Home Loan Repayment: What Longer Tenure Could Mean For Mortgage Borrowers?

Reserve Bank of India (RBI)’s recent decision of 50-basis point (bps) hike in the repo rate has impacted the home loan borrowers with a dilemma. With this repo rate revision, the existing home loan borrowers are now confronted with two choices – whether to pay higher monthly instalments or continue paying the same amount but for a relatively longer period of time. 

According to a Livemint.com report, an analysis by BankBazaar reported that the home loan borrowers may lose out if they refused the change the equated monthly installment (EMI) and extend the time period in order to account for the 190-bps hike between May and September. 

The report goes on to explain this by mentioning that home loan borrowers who took a Rs 50 lakh loan for 20 years at 7 per cent have seen the rate increase to 8.9 per cent in the last two years. In this case, if these borrowers keep the time period fixed but choose to pay a higher installment every month, they will be subject to pay about Rs 14 lakh as the total additional interest payment over the loan’s lifetime. 

In comparison, if home loan borrowers pay their EMIs for an additional 184 months by extending the tenure but not changing the monthly amount, the interest outflow will be about Rs 71 lakh, the report mentions. 

However, if the total loan repayment period reaches the age at which the borrower is expected to retire, in that case, even the banks will not be in a position to increase the tenure anymore. In this case, if the loan amount is planned in a way that a borrower is supposed to repay till the age of 60 or their retirement age, a hike in these rates would mean higher EMIs as the time period will not be increased. 

Hence, in order to solve such problems, the report says that banks are in a dire need to work around a solution that would involve both increasing tenure and EMI amount. 

Citing a senior banker on conditions of anonymity, the report mentions that since the repo rate changes by the RBI were so frequent, many times, banks didn’t have even indulge in the process of asking home loan borrowers of the option they wanted to opt for. As a result, the time period of the loan amount was extended unilaterally and the monthly EMI amount was kept unchanged. Regardless of all such activities, bankers reportedly have not seen much change in the demand for home loans.