Opting for a Home Loan is one of the most common ways to purchase a home. You do research, assess your financial life and select the Home Loan tenure and EMI amount that suits your situation. But what should you do if the interest rates increase, putting you in a fix?
It is important to understand that changes in the RBI’s repo rate impacts your Home Loan EMIs. When the repo rate increases, banks also increase the Home Loan interest rates and vice versa. This means it increases the EMI burden for the Home Loan buyer.
Have a look at the table below.
| Loan Amount |
Assumed Interest Rate (p.a.) |
Tenure |
Current EMI |
Increased Interest Rate (p.a.) |
New EMI |
| ₹30,00,000 |
7% |
20 |
₹23,259 |
7.5% |
₹24,168 |
| ₹50,00,000 |
7% |
20 |
₹38,765 |
7.5% |
₹40,280 |
| ₹1,00,00,000 |
7% |
20 |
₹77,530 |
7.5% |
₹80,559 |
Things you can consider when your Home Loan interest rate increases
When the interest rate on your Home Loan increases, it does impact your overall repayment amount. To combat such a situation, you can consider one of the following:
Extend your Home Loan tenure
One of the easiest ways to fight increased interest rates is to increase your Home Loan tenure. This may help people who cannot increase their EMI portions due to multiple financial obligations. However, this may also have a flip side.
For example, if Priyansh (35) takes a home loan of ₹30 lakhs at 7% for an original term of 20 years, he will have to repay the loan till he reaches the age of 55 years (in case of no prepayment). If the interest rate increases, the bank, to maintain the current EMI, increases the tenure by 10 more years. Now, he needs to repay the loan till he reaches 65 years! This may seem difficult since repayment of debt in retirement years may be stressful.
Pay higher EMIs
If you wish to repay your loan within a stipulated time, you must pay the revised EMI, which may be substantially higher. Opting for this option may not impact the additional interest cost in case of increased tenure.
Opt for prepayment
Prepayment of loans means to repay the loan amount in full or in parts before the end of the tenure. If you have surplus savings, or in case of bonus earned, consider this option as it may help you save on your overall EMI substantially.
Which is Better: Extend Your Home Loan Tenure or Pay Higher EMI?
Extending your Home Loan tenure makes sense as it will not change your EMI payments due to rise in the interest rates. However, it also increases your overall interest cost as your loan burden is extended for more years. Let us continue with the example of Priyansh. When the tenure is increased to 30 years from the initial 20 years, Priyansh’s interest cost for the entire tenure increases to ₹41.85 lakh from the original ₹25.82 lakh. Thus, to avoid paying the huge interest cost, you can consider increasing the EMI of your loan if your financial conditions allow. Additionally, making a proactive partial prepayment can effectively reduce your Home Loan liability, alleviating the EMI burden.
Conclusion
The decision to increase the Home Loan tenure or the EMI amount must not be taken in isolation as it impacts your overall financial plan. Hence, you must assess your financial life and the impact it may have on your other goals to come to a decision. At Axis Bank, we acknowledge the hurdles involved in handling a Home Loan, and we're committed to supporting you throughout the entire process. Our Home Loans offer flexible EMI choices, competitive interest rates, and a variety of features to simplify your home buying journey.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
