Don’t Increase The Tenure Of Your Home Loan If You Can Help It

Home loan borrowers have borne the brunt of the sharp increase in interest rates by the Reserve Bank of India in its fight against inflation. The central bank has hiked rates by 250 basis points, since May last year.

In several cases, though, borrowers have not seen their equated monthly instalments go up and so the increase has not pinched. At least, not just yet.

When interest rates rise, home loan borrowers have the choice of whether to pay a higher EMI or to increase the tenure of the loan. And while the second option results in less of a strain in the short run, it leads to a ballooning of interest cost. Most banks choose to increase the tenure if the borrower does not specify otherwise.

Riyaj Shaikh, in his early 30s, is one of many home loan borrowers currently. He took a Rs 17 lakh loan at the start of 2022, at 6.7% rate of interest. Since then, the interest on his home loan has risen to 8.95% and is set to rise to 9.2% on April 1. Since Shaikh didn't specify otherwise, the lender— in this case HDFC Ltd.— raised his loan tenure as the default option. As a result, the loan tenure has increased to over 34 years, even before the reset of the rate in April.

If Shaikh continues to repay his home loan as per the current schedule, it would mean he would still be repaying the loan beyond retirement age—something banks generally are not comfortable with. Shaikh told BQ Prime he intends to pre-pay his loan.

According to Pankaj Bansal, chief business officer at Bank Bazaar, it is always beneficial to pre-pay a home loan. A simple strategy to follow would be to pay one extra EMI every year.

“If I take a 20-year loan as an example and I pre-pay 5% of the outstanding balance every year, the tenure of the loan falls to 11 years. Even if I pay one extra EMI every year, my loan tenure will reduce by nearly four years,” he said.

BQ Prime also spoke to Nikhil Kothari, director at Ética Wealth Pvt., about the best strategies to employ when repaying a home loan and whether individuals should consider putting off a house purchase with interest rates likely near their peak.

Watch the conversation here: