Your home loan EMI is determined by 2 things - the rate of interest and the tenure of your home loan. Of these 2 factors, the interest rate is determined by the RBI and Banks, tenure is what you can adjust based on your home cost and your EMI affordability.

The first thing to know is that your Home loan interest rate is a floating Interest rate i.e. the interest rate on your home loans would increase and decrease depending on the repo rates set by the GOI. If the interest rate goes down, it will benefit you because you will be paying out a lesser amount of interest. On the other hand, if the interest goes up, then you pay more interest.

In the past 8 years, the interest rate has been on the downward trend making home buying a very lucrative deal for us as the home loan kept getting cheaper. However, in the past 6 months, the interest rate has been raised twice by the RBI. The RBI is increasing the interest rate to curb the rise in inflation. You can read more about it here. 

See the Interest Rate chart here to know the movement of the Interest rate by the GOI.

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How would increase in interest rate affect a home-buyer’s payout?

The Reserve Bank of India (RBI) raised its key repo rate by 50 bps to 4.9% during its June meeting, after May's surprise 40 bps off-cycle hike, surprising markets had forecast a 40 bps rate hike

Many Investors, who bought houses at the interest rate of 6.75% - 6.95% (at their lowest), will now have a big impact on their EMI. Their Home loan interest rate would increase by at least 1% in the coming months. In fact, if there is a further increase from RBI, your home loan interest rate could also go up to 8%. The interest rate determines your EMI, so where there is an increase in interest rate, your EMI would increase. Many banks are offering that instead of EMI, increase your tenure of the home loan (which sounds more doable as it will not impact the home-buyers cash flows). 

In the example below, we shall explain to you what you should opt for with the increased interest rates.

Increase your EMIs - keeping tenure the same.
Increase your tenure - keeping EMIs the same.

An example: 

House Loan - INR 1 crore

Interest Rate - 7%

Tenure - 25 years

EMI - 70,678

Total Interest payout - 1,12,03,335

Total Payout  - INR 2,12,03,335

 

How your EMI will be affected by an increase in interest rate by 1%

table 1 (3)

In this table, you can observe that with an increase in interest rate, the EMI is also increasing and hence, the total interest payout over your home loan tenure has also increased.

Banks these days instead of raising your EMI will increase the tenure of your loan. Let's understand how that would impact your overall interest payout.

How your increase in tenure can impact your loan payout?

However, many banks are not increasing their EMIs, but increasing the tenure on the home loans. Let's see how that would impact your total cash outflow over the home loan period. 

table 2 (1)

You can observe from the above tables that the total interest payout when you keep the EMI the same is much more than the option of increasing your EMIs.

table 3 (1) (1)

You can learn more about buying a house from our course - Money & Makaan - 

Change in interest rate is not something you can control but is determined by RBI and the banks. The best approach is to be prepared for an increased rate and keep some cash flow free so you are able to afford the rise in EMIs.

Wealth Cafe Advice: 

Remember when the increase in interest rates is beneficial to your banker, they will not call you and tell you how the tenure increase instead of EMI increase is better for them than for you. 

The best approach for you would be to understand the difference between the 2 approaches and their impact on your cash flow. Connect with your banker and ask them to share a calculation, loan amortisation sheet, and understand your numbers. You can reach out to us at iplan@wealthcafe.in to know more about it.