An increase in home loan interest rates can affect a borrower’s monthly budget and the total cost of repayment. When interest rates rise, borrowers generally face two choices: increase their equated monthly instalment (EMI) to repay the loan sooner or extend the repayment tenure to keep monthly payments manageable.
Although extending the tenure can provide immediate financial relief, it may also increase the total interest paid over the life of the loan. The better option depends on several factors, including income stability, existing financial obligations, available savings and the remaining loan tenure.
Mehernosh Tata, managing director and chief executive officer of Godrej Housing Finance, said borrowers with stable incomes and sufficient room in their monthly budgets could consider increasing their EMIs to control additional interest costs. Those facing tighter budgets may prefer a longer tenure to manage their monthly expenses, while recognising that this could make the loan more expensive overall.
How a 25-Basis-Point Rate Hike Affects Your Home Loan EMI
Consider a home loan of ₹50 lakh with a repayment period of 20 years. According to calculations provided by Tata, if the interest rate increases from 8.5% to 8.75%, the monthly EMI would rise from ₹43,391 to ₹44,186.
This represents an additional payment of ₹795 every month.
The increase would also raise the total interest payable over the original 20-year tenure from approximately ₹54.14 lakh to ₹56.05 lakh, assuming the revised EMI is paid throughout the original repayment period.
Borrowers should evaluate this additional cost against their monthly income and expenses before deciding how to respond to an interest rate reset. Those who can comfortably afford the higher EMI may choose to retain their existing tenure and limit the additional interest burden.
However, a higher EMI may be difficult to manage for borrowers with substantial household expenses, other loan repayments or irregular income. Extending the tenure can ease monthly financial pressure, but it means the outstanding loan will take longer to repay.
Higher EMI vs Longer Tenure: Which Option Costs Less?
Increasing the EMI while keeping the original tenure allows borrowers to repay the principal more quickly. Because interest is calculated on the outstanding principal, reducing the balance faster can help lower the overall interest cost.
Extending the tenure works differently. It spreads repayment over a longer period, reducing the immediate monthly burden but allowing interest to accumulate for additional months.
In the ₹50 lakh loan example, Tata said that keeping the EMI unchanged and extending the repayment period by 12–13 months could bring the total amount repayable to ₹59.41 lakh.
The figures are illustrative, and actual repayment costs will vary according to the outstanding principal, remaining tenure, applicable interest rate and loan terms. Borrowers should request a revised repayment schedule from their lender to compare the EMI, repayment period and total interest under both options.
The difference can be particularly important when a large principal amount remains outstanding or the loan is still in its early years. During this stage, a larger proportion of each repayment generally goes towards interest, making the speed of principal repayment an important factor in determining the total cost.
What Can Borrowers Do After a Home Loan Rate Reset?
Borrowers have several options to consider when interest rates change. They do not necessarily have to choose between a higher EMI and a longer tenure without reviewing the alternatives.
Under the Reserve Bank of India’s August 2023 framework for floating-rate loans repaid through equated instalments, regulated lenders must communicate changes to EMI or tenure and provide borrowers with options for managing the impact of rising interest rates.
These options include increasing the EMI, extending the repayment tenure or combining both approaches. Borrowers may also make partial or full prepayments. Switching to a fixed interest rate is another possibility, subject to the lender’s applicable policies and terms.
A partial prepayment reduces the outstanding principal and may help lower the overall interest burden. However, borrowers should avoid using all their emergency savings to pay down a home loan. Keeping sufficient funds available for essential expenses and unexpected financial needs remains important.
Moving to a fixed-rate loan may provide greater certainty about future repayments. Before making the switch, borrowers should compare the revised interest rate, conversion charges and other applicable conditions.
The precise choices and associated costs depend on the loan agreement and the lender’s policies. It is advisable to obtain a written explanation of the available options and their long-term financial implications before agreeing to a revised repayment schedule.
Ultimately, the decision should balance monthly affordability with the total cost of borrowing. Increasing the EMI may suit borrowers with stable incomes and enough monthly surplus, while extending the tenure may be more practical for those who need to protect their cash flow. Comparing the complete repayment cost, rather than looking only at the immediate EMI change, can help borrowers make a more informed decision.
Disclaimer: This article is intended for general informational purposes only and should not be treated as financial advice. EMI calculations and repayment figures are illustrative and may differ based on individual loan terms, interest rates and outstanding balances. Borrowers should consult their lender, review the applicable loan agreement and consider their financial circumstances before making changes to their repayment arrangements.