Making Most of Your Home Loan EMIs

India’s top lender, the State Bank of India (SBI), has restored its original interest rates for home loans from April 1, withdrawing the limited period special concessions it offered during the festive season. What this effectively means is that the home loan interests would now start from 6.95 per cent, up from 6.7 per cent till March 31. Although this is not a rate hike in actual terms as the original rate was already 6.95 per cent, the move has brought some questions in the minds of the borrowers as to what they should do if the rates are increased in near future.

Since the lending rates, under the RLLR (Repo Linked Lending Rate) structure, are directly linked to the repo rate set by the RBI, there seems to be no threat of the rates increasing in near future as the RBI in its last Monetary Policy Committee meeting decided to leave the policy repo rate unchanged at 4 per cent. Not only that, but it also decided to continue with the accommodative stance as long as necessary to sustain growth. This means that the central bank will cut rates to inject money into the financial system whenever needed. So technically, the possibility of a rate hike is not in near future.

As long as one has switched to the RLLR structure, there is no need to worry. The 25 basis points hike in interest rates by the SBI, as the bank has also clarified, is only the withdrawal of the festive offer and there has been no change in the original lending rate.

However, if you have not switched to the RLLR structure, chances are that you may still be paying a much higher interest rate than you need to. So you must contact your bank and switch to RLLR to make most of your money as you pay the EMIs for the home loan. 

If, unfortunately, the rates do start increasing going up in the future, what can you do? The first option you can choose is to increase the tenure of the loan while keeping the EMI fixed. While this would not put any extra pressure on your day-to-day expenses, it is inadvisable as it would cost you a lot more money in the form of interest payments over the long term as you would be paying back the EMIs for an extra few years. During this entire time, you would be paying the interest at the hiked rate. Also, this option may not be available to all borrowers either. So you must contact your bank to get more details.

Instead, if your finances allow, you could increase the EMI amount while keeping the tenure the same. This would put an extra strain on your monthly budget but would save you a lot of money over the entire period of the loan tenure. When interest rates on your home loan increase, you could also consider making upfront lump sum payments, of the amount you can conveniently afford, to bring down the principal value as well. By doing so, you would eventually be paying interest on a much smaller principal and would end up saving money in the long term. You can do some rough calculations or use an online calculator, or even consult the bank, to arrive at a number for pre-payment which allows you to retain the same EMI amount going forward, while also retaining the same tenure. 

Most importantly, do your research to figure out if your bank is charging you a fair rate of interest. If you find that another bank, probably a public sector bank, is offering loans at a much lower rate, you could also consider switching your loan to that bank. However, since this involves one time costs, do it only if the difference is substantial.