Increase hold time, not Emi to reduce burden, experts say

By Anshul STI (Update)


Following the rise in RBI repo rates, the cost of credit for existing borrowers and new borrowers will increase. What should you do – increase EMI or hold time?

A home loan borrower on a loan term of 20 years may end up paying more interest than the principal, experts say after the Reserve Bank of India (RBI) raised the repo rate by 50 basis points additional basics. With Friday’s repo rate hike and the two previous increases, overall lending rates jumped at least 190 basis points. Along with the bank margin, interest rates on home loans are now at or above three-year highs.

In a regime of high interest on home loans, it is better to prepay EMIs to reduce interest expenses, experts say.

Talk to CNBC-TV18.comBankbazaar Chief Executive Officer (CEO) Adhil Shetty said that prepaying even an additional equivalent monthly installment (EMI) can reduce your term by 3 years.

Lump sum advance payments, however, may not be possible for everyone. And there is always the dilemma of choosing between a higher EMI and permanence.

The alternative to look at here is to increase your EMIs every year, said Naveen Kukreja – CEO and Co-Founder, Paisabazaar.

“Opting for the increased tenure option would result in higher interest charges than the increased EMI option. So, it is better to go for an increase in EMI,” Kukreja said.

And increased EMIs can significantly reduce a home loan borrower’s overall term and interest expense.

According to Shetty, increasing EMI by just 5% per year can help a mortgage borrower close a 20-year loan in just 12 years and 7 months (151 months). Even better, if a borrower can increase EMI by 10% per year, the loan can be completed in less than a decade.

“It’s because anything you pay beyond your EMI goes straight to your unpaid principal. And it’s not a huge amount to start with. If your EMI is Rs 40,000, then another 5% comes at Rs 2,000 per month, which shouldn’t be too hard,” Shetty of Bankbazaar added..

Here is a table showing the increase in EMI on Rs 30 lakh home loan (with different rate increase scenarios):

(Source: Bankbazaar)

This table clearly shows that choosing a higher EMI option rather than increasing the tenure can reduce interest charges.

These days, borrowers with limited cash also have the option of opting for home loan savings options, said Kukreja of Paisabazzar.

“Under this facility, an overdraft is opened in the form of a current or savings account where the borrower can park his surpluses and withdraw them according to his financial needs. The interest component of the home loan is calculated after deduction of parked surpluses. into the savings/current account from the outstanding home loan,” he said.

Here are the latest rates offered by banks on home loans:

Banks Starting interest rate (pa)
National Bank of India 7.55%
Citibank 6.65%
Union Bank of India 7.40%
Bank of Baroda 7.45%
central bank of india 7.20%
Bank of India 7.30%
Axis Bank 7.60%
Canara Bank 7.60%

(These are the rates before RBI raised repo rates on August 5. They are subject to change in the near future.)

Additionally, existing home loan borrowers who have seen substantial improvements in their credit profile by taking advantage of their home loan should explore the possibility of saving on interest charges through home loan balance transfer. Their improved credit profile can make them eligible for home loans at much lower rates from other lenders, Kukreja said.

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