The Reserve Bank of India (RBI) has announced a 25-basis-point increase in its repo rate, pushing it to 5.50%. This latest hike is set to elevate borrowing costs for millions of floating-rate home loan borrowers across the country. As lenders adjust their rates, homeowners face a critical financial decision: absorb a higher Equated Monthly Instalment (EMI) or extend their loan repayment tenure.
For many, the immediate impact will be a noticeable change in their monthly outgo. While extending the loan period might seem like an easier option to maintain current EMI levels, financial experts largely advise against it due to the significant increase in total interest paid over the life of the loan.
Understanding Your Choices After a Rate Hike
When floating home loan rates rise, borrowers typically have three primary options:
- Accept a Higher EMI: Maintain the original loan tenure but pay a larger monthly amount. This means becoming debt-free as initially scheduled.
- Extend Loan Tenure: Keep the EMI broadly unchanged by stretching the repayment period. This offers immediate budgetary relief but extends the period over which interest accrues.
- Combination: A blend of both, slightly increasing EMI and marginally extending tenure.
"The RBI’s decision to increase the repo rate reflects its continued focus on containing inflation while maintaining macroeconomic stability," stated Atul Monga, CEO & Co-Founder of BASIC Home Loan. "While this move is likely to result in a marginal increase in home loan borrowing costs, we do not expect it to significantly alter homebuyer sentiment or long-term housing demand."
The Cost of Extending Tenure
While an unchanged EMI might sound appealing, experts caution against extending the loan tenure. Adhil Shetty, CEO of BankBazaar, noted, "Many lenders extend the tenure to keep the EMI unchanged, which feels easier but costs more over time."
Consider a ₹50 lakh home loan initially at 7.5% over 25 years, with an EMI of approximately ₹36,950. A 25-basis-point hike to 7.75% would increase the EMI to about ₹37,766, a monthly rise of around ₹817. If this higher rate persists for the entire 25 years, the total interest paid would jump from ₹48.68 lakh to ₹50.64 lakh, adding an extra ₹1.96 lakh to the interest burden.
However, if the borrower chooses to keep the EMI at the original ₹36,950 after the rate hike to 7.75%, the loan tenure could extend by approximately two years, increasing the total interest payment significantly. For a ₹50 lakh loan, this means continuing to pay interest for an additional 24 months.
Expert Recommendations for Borrowers
Financial advisors generally recommend opting for a higher EMI if it is within the household's comfortable absorption capacity. "The smartest approach is to absorb the rate increase by opting for a higher EMI instead of extending loan tenures, as stretching the repayment schedule significantly inflates cumulative interest," advised Monga.
Shetty also suggested proactive measures: "Borrowers should ask their lender how the rate change will be applied and consider making periodic prepayments. Making a small prepayment each year can help limit the extra interest." Monga added that using annual savings or bonuses to prepay an additional EMI or checking for internal repricing options could also help mitigate costs.
Ultimately, the decision hinges on individual financial circumstances and cash flow. While a longer tenure can alleviate immediate pressure, understanding the long-term financial implications is crucial before making a choice that could cost substantially more over the years.