Home loans have helped many people build their own homes. Depending on the home loan interest rate and the term of the loan, the EMI or equivalent monthly installments are set for home borrowers. Before even availing a home loan from the lender of their choice, one can use a home loan calculator to calculate the EMI they have to pay.
Calculating the EMI home loan will give you a clear idea of how much you need to pay and help you make an informed decision on choosing a suitable home loan. In a home loan calculatorthe EMI of a home loan is calculated using the principal amount, the interest rate and the term of the loan.
Repo rates and home loan interest rates
Interest rates for home loans depend on the repo rate determined by the Reserve Bank of India (RBI). The Repo rate is the rate at which banks borrow money from RBI. When RBI raises the repo rate, banks and housing finance companies will raise lending rates. This will result in increased interest rates for home loans as well.
RBI increased the repo rate by 40 basis points. As a result, the interest rate for housing loans may increase by 30 to 40 basis points. If a home borrower has opted for a variable rate loan, an increase in the repo rate will directly affect the interest rate of the home loan. It should be noted that if the lender does not inform you of the revision of the interest rate of the mortgage, it is possible that he has already increased the duration of the loan without informing you.
To counter the effects of an increase in the interest rate on home loans, either the term of the loan must be extended or the EMI must be increased. Banks prefer to choose to increase the term of the loan because it is easier and hassle-free for the bank.
How to Manage Your EMI Home Loan
If you have taken out a home loan and heard about the interest rate going up, you must be thinking whether to extend the term or increase the EMI. If you can afford it, it is better to increase the EMI. As a result, your home loan will close on the original schedule. Make sure it doesn’t hurt your monthly budget.
According to experts, there will be more interest rate hikes in the future. For mortgage borrowers, it is advisable to increase the EMI or even make early repayments to ensure that the duration of their mortgage remains close to the original one. If you keep the current EMI without making a prepayment, it could result in extending the term of the loan by more than a decade and you could end up paying double the cost of the loan.
Let’s take an example to understand this.
Suppose you have an outstanding loan of Rs. 50 Lakh loan at an interest rate of 7% and a remaining term of 10 years. If the interest increases by 40 basis points and the interest stays at 7.4% for the remainder of the term, you will need to pay around Rs. 1,000 on your current EMI to close the loan at the scheduled time.
If you are not ready to increase your EMI, your tenure will increase and you will have to pay an additional four months to close your home loan. If you kept the same NDE and the home loan interest rate increases to 8.5% over the next 12 months, the term of the loan can be extended by 12 to 14 months.
If your budget is not flexible enough to increase the EMI, it is better to make early repayments. This is a good option because it will ensure that your loan term remains close to the actual schedule, even if you continue to pay the same EMI. Making prepayments will also help you spend less on the interest component of the loan.
Disclaimer: The article mentioned above is a sponsored feature. This article is a sponsored post and does not involve any journalistic/editorial involvement by IDPL.