Reserve Bank of India (RBI) increased policy rates tenth time. Banks may increase loans interest rates because of increasing in repo and reverse rates by Reserve Bank of India. This would make a big impact on the long term housing loan salaried employees monthly EMIs (Equal Monthly Installments). for example for Rs.30 Lakhs loan for 20 years tenure, if interest rate increased @ 1.5%, extra 14 years EMIs need to be paid or Rs.6,72,407.00 should be paid extra.
In this case, loan payer has three options, from which he can select whichever is beneficiary for him.
For example if 1.5% interest rate is increased from 10% to 11.5% for Rs.30 lakhs loan of 20 years tenure, if tenure is increased, payer should pay extra 165 months EMIs. Then complete loan tenure would be 33 years.
Advantages:1.This option is useful if interest rates decreases in future.
2.Tax benefit may be availed as long as EMIs exist.
Disadvantages: 1.If interest rates increases interest amount to be paid would be more than the principal amount.
2.Many banks won’t allow tenure beyond 20-25 years.
3.Some banks won’t allow to extend tenure after retirement.
2.Increasing EMI Amount:
For the above example if EMI is increased without changing the tenure every month Rs.2,949.00 need to be paid extra. That means EMI would increase from Rs.28,951.00 to 31,900.00. This would be extra of Rs.6 lakhs 70 thousands.
Advantages: 1. This option is beneficiary for high salaried ,working couples,extra income holders.
2.This option may be opted if increment hiking is guaranteed.
Disadvantages: Many banks won’t allow more than 40-50% of salary for EMI.
3.Repayment in Advance:
If 20% of loan Rs.6 lakhs is repaid in Advance, then payer can save Rs.7.26 lakhs of interest. EMI can be reduced or else if same EMI is continued loan tenure will be reduced 59 month early. Funds from Fixed Deposits can be diverted to repay the loans. Anyway Fixed deposits interest rates are low compare to Bank loan interest. So it is beneficiary. Otherwise if any funds like bonus, chits etc. is available for repayment in advance, it would be helpful.
Advantages: Interest to be paid , EMI amount , tenure can be decreased.
Disadvantages: Other funds need to be diverted, which are planned for other needs.