RBI has increased repo rate from 4% p.a. to 6.5% p.a. since May 2023. If your home loan is benchmarked to RBI Repo rate, that means a hike of 2.5% in your home loan interest rate.
Impact of Interest Rate Hike on Your Loan Tenure
Usually, the default option in case of interest rate hike or fall is to adjust the tenure.
- If the interest rate goes up, the loan tenure gets extended.
- If the interest rate goes down, the loan tenure gets reduced.
Let’s say you have an outstanding home loan of Rs 50 lacs with remaining tenure of 15 years and an interest rate of 7% p.a. EMI of Rs 44,941.
Overnight, the interest rate goes up from 7% to 9.5% p.a. Assuming EMI remains constant, any guesses on how this impacts the loan tenure?
The loan tenure goes up to staggering 269 months from the original 180 months. You pay the same EMI for a staggering 89 more months. Tenure up almost 50%. Assume nothing changes hereafter, you pay ~40 lacs (89 X 44,941) more to close the same Rs 50 lacs loan.
Sometimes, it is not easy to appreciate these numbers. After all, what big difference can a hike of a few percentage points make? And we can’t relate to this unless you check loan mathematics. Or you get an email from the bank intimating you of the change.
By the way, the RBI is not done yet. There may be more hikes in the offing. Therefore, the situation can get even worse.
Here is a table showing how sharply your loan tenure rises in case of a rate hike.
| Loan Amount | 5,000,000 | |||||
| Loan Tenure | 18 months | |||||
| Rate Hike | 0.50% | 1% | 1.50% | 2% | 2.50% | 3% |
| Original Interest Rate | Revised Loan Tenure in Months (EMI assumed constant) | |||||
| 7.00% | 190.8 | 203.7 | 219.8 | 240.7 | 269.7 | 315.6 |
| 7.50% | 191.1 | 204.6 | 221.6 | 244.0 | 276.2 | 330.6 |
| 8.00% | 191.5 | 205.6 | 223.5 | 247.7 | 283.8 | 350.6 |
| 8.50% | 191.9 | 206.6 | 225.6 | 251.9 | 292.8 | 379.4 |
| 9.00% | 192.3 | 207.7 | 227.9 | 256.6 | 303.8 | 428.5 |
What Can You Do?
Not much. And there is no free lunch.
If you do not want to see an increase in tenure, you have 3 options.
- Let the EMI go up.
- Make a prepayment.
- Shift to another lender that offers a lower rate. Don’t expect a massive cut here. Plus, there will be additional cost in shifting.
I will focus on (1) and (2) in this article.
To Keep the Tenure Constant, How Much Will the EMI Go Up?
| Loan Amount | 5,000,000 | |||||
| Loan Tenure | 180 months | |||||
| Rate Hike | 0.50% | 1% | 1.50% | 2% | 2.50% | 3% |
| Original Interest Rate | Percentage Increase in EMI (to keep the tenure constant) | |||||
| 7.00% | 3.14% | 6.32% | 9.56% | 12.84% | 16.18% | 19.56% |
| 7.50% | 3.09% | 6.23% | 9.41% | 12.64% | 15.92% | 19.24% |
| 8.00% | 3.04% | 6.13% | 9.27% | 12.45% | 15.67% | 18.93% |
| 8.50% | 3.00% | 6.04% | 9.13% | 12.25% | 15.42% | 18.63% |
| 9.00% | 2.95% | 5.95% | 8.99% | 12.06% | 15.18% | 18.33% |
Since we are speaking about a 2.5% hike in the last 10 months, we are looking at 15-16% hike in EMI amount. That’s not a small hike either.
In this case, the EMI goes up from Rs 44,941 (50 lacs, 7%, 15 years) to Rs 52,211 (after rate hike of 2.5%). That’s an increase of Rs 7,269 per month. Not easy. But that’s what you signed up for when you took a floating rate loan.
Can You Somehow Keep Both EMI and Loan Tenure Constant?
Yes, by making a partial prepayment. However, as expected, it is not going to be easy.
| Loan Amount | 5,000,000 | |||||
| Loan Tenure | 180 months | |||||
| Rate Hike | 0.50% | 1% | 1.50% | 2% | 2.50% | 3% |
| Original Interest Rate | Prepayment required to keep Both EMI and tenure constant | |||||
| 7.00% | 152,016 | 297,304 | 436,213 | 569,073 | 696,193 | 817,867 |
| 7.50% | 149,844 | 293,109 | 430,135 | 561,241 | 686,730 | 806,888 |
| 8.00% | 147,691 | 288,950 | 424,107 | 553,473 | 677,343 | 795,994 |
| 8.50% | 145,559 | 284,829 | 418,133 | 545,773 | 668,035 | 785,190 |
| 9.00% | 143,447 | 280,747 | 412,215 | 538,143 | 658,811 | 774,481 |
As you can see, you need to prepay about Rs 7 lacs to keep both EMI and the loan tenure constant. Of course, the prepayment amount will go up or down depending on the loan amount outstanding.
For prepayment, you can use a portion of your savings or annual bonus. Or any cash windfall. Remember 9%-10% on your home loan is not a small cost. So, if your money is simply lying stashed in your savings bank account, it is a good time to put some of that money to good use. Remember, interest saved is interest earned.
You Can Mix and Match
You do not have to stick to just one approach. You can combine two approaches.
Let’s say your current EMI is 40,000. And you can manage up to Rs 45,000 per month. And you do not want your loan tenure to be extended by more than a couple of years. So, you can prepay the loan just enough to ensure that the EMI does not breach Rs 45,000 and the tenure remains in your comfort zone.
I would prefer not to let the loan tenure go up. What do you plan to do?