The Reserve Bank of India (RBI) recently raised its policy repo rate by 25 basis points, increasing it from 5.25 to 5.50 per cent. This adjustment has significant implications for borrowers, particularly those with home loans linked to floating interest rates. As interest rates rise, families may need to reassess their monthly budgets, which could lead to cuts in discretionary spending or adjustments in financial goals.

With the new rate in effect, existing borrowers face a crucial decision: either accept a higher equated monthly instalment (EMI) or request an extension of their loan tenure to maintain manageable monthly payments. The choice between these options can greatly affect a household’s financial stability and long-term planning.

According to Adhil Shetty, CEO of BankBazaar, the decision should be based on each household’s financial situation and future objectives. He emphasises that selecting a home loan tenure involves balancing monthly affordability with overall loan costs.

Evaluating Higher EMIs Versus Extended Tenure

Borrowers with sufficient room in their budgets may consider opting for a higher EMI following the interest rate adjustment. This approach allows for faster repayment of the principal amount, potentially reducing the total interest paid over the loan’s duration. Such a strategy may be particularly suitable for salaried individuals whose incomes have increased or for families with minimal existing debt.

However, it is essential for homeowners to factor in other financial obligations, including children’s education, healthcare for ageing parents, and retirement savings. A higher EMI should not compromise essential expenses or emergency funds, as maintaining financial security is crucial.

On the other hand, borrowers facing tighter budgets may prefer to keep their EMI unchanged and extend the loan tenure. This option provides immediate relief by preventing a significant increase in monthly payments. Although this approach can ease cash-flow pressures, it generally results in a higher total interest cost over the extended repayment period.

Exploring Alternative Strategies for Borrowers

Borrowers are not limited to choosing between a higher EMI and a longer loan tenure; they may also consider part-prepayment as a viable option. This strategy allows individuals to use surplus funds, such as bonuses or investment returns, to reduce the outstanding principal. A lower principal translates to less interest accrued in the future, potentially shortening the loan tenure while keeping the EMI steady.

Shetty highlights that many borrowers successfully utilise bonuses or savings to make part-prepayments, thereby lowering their overall borrowing costs without committing to increased monthly payments. However, it is crucial for borrowers to retain an emergency fund, especially in uncertain economic conditions.

Before proceeding with part-prepayment, borrowers should consult with their lender to understand how this payment will impact their outstanding principal, EMI, and remaining tenure. It is also advisable to review the lender’s terms and any applicable charges associated with prepayment.

Options Available Under RBI Guidelines

The RBI’s framework for floating-rate loans allows borrowers to explore various options when their repayment terms are reset. These options include increasing the EMI, extending the repayment period, or a combination of both. Borrowers may also switch to a fixed interest rate if available under their lender’s policy.

It is important for borrowers to communicate with their banks or housing finance companies to obtain updated information on revised interest rates, new repayment schedules, and total interest payable under each option. Understanding whether the lender has increased the EMI, extended the loan tenure, or implemented both changes is vital for informed decision-making.

While a longer tenure may not be immediately apparent if the EMI remains unchanged, it can significantly impact the total repayment amount over time. Therefore, borrowers should carefully evaluate their options in light of the recent repo rate hike to make the best financial decision for their circumstances.

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