Following the rise in the repo rate, your home loan interest rate has risen by 2.25 percentage points since May 2022. The jump might not have pinched you if you continued paying the same amount of EMI without checking the revised tenure of your loan. But the impact of the rate hike is much more significant if you compare the tenure of your loan.
Consider this: Your 20-year loan of Rs 50 lakh at 7 per cent has now turned into a loan of 45 years and 9 months, a jump of 25 years and 9 months. The calculation is based on the assumption that the rate got revised to 9.25 per cent after 6 months of taking the loan.
In such a scenario when home loan rates have crossed the mark of 9 per cent, the concerning point is the tenure of the home loan that has already crossed the working age of 60 years for many borrowers. Given the steep rise in the tenure of loans, which is the default option for banks when the lending rates rise, it is important that you are aware of its implications in the long run.
What is better to increase tenure or EMI? If you are already living on a tight budget it is better to increase your tenure without hurting your spending and savings.
But if you have a surplus then you have three options: First to increase your EMI, second to pre-pay with the surplus amount and third to invest the surplus amount somewhere else where the return is higher considering a home loan is the cheapest loan and comes along with tax benefits. Having said that if you choose to increase the tenure make sure you invest the extra amount for generating higher returns.
For example, If you have Rs 5 lakh, and on average, based on your past investment experience, you can get a 12 per cent return on the amount invested. It makes more sense to invest Rs 5 lakh for that return, and continue the home loan with revised tenure.
“If a borrower chooses to increase the repayment tenure of the loan, they can save the extra amount and use it for repaying another loan or can invest the same for a higher return which will balance out the increased interest burden,” said V Swaminathan, Executive Chairman, Andromeda loans and Apnapaisa.
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