In 2022 the Reserve Bank of India increased the repo rate five times, amounting to a total increase by 2.25 percent. As a result, the average home loan interest rate is said to have gone up from 7 percent to 9.25 percent, thereby impacting home loan borrowers most severely. The easiest way to reduce exposure, in our opinion, is to consider partial repayment of your current loan as most home loans are usually taken on floating interest rates and do not usually invite penalties for partial or early repayments.
In 2022 the Reserve Bank of India increased the repo rate five times, amounting to a total increase by 2.25 percent. As a result, most home loan providers raised their lending rates by an average of 2percent or more along with increasing the loan tenure and EMI amounts. The average home loan interest rate is said to have gone up from 7 percent to 9.25 percent, thereby impacting home loan borrowers most severely. While it may not seem like a sizeable increase on the surface, borrowers with large outstanding or long tenures are likely to suffer the most.
To shed light on the current situation, if we were to take, as an example, a home loan outstanding of Rs 50 lacs, with a tenure of 20 years. The new increased rates will recalibrate this amount to Rs 60lacs, indicating a Rs 17 lac increase from the earlier total of Rs 43 lacs. This figure is taken assuming the EMI remains unchanged. Thus, it is essential that borrowers make themselves cognisant of all the options available to them to limit their exposure to the additional monetary obligation in front of them.
The easiest way to reduce exposure, in our opinion, is to consider partial repayment of your current loan. Given that home loans eat up into a sizeable amount of one’s monthly running expenses, it might be advisable to try and repay the loan as most home loans are usually taken on floating interest rates and do not usually invite penalties for partial or early repayments. The goal to be considered is to stop inflation from elongating your debt period, i.e., even if you have taken a home loan with the intention of paying it off sooner that the timeline decided, increased interest rates might make it more expensive for you to clear the loan in the same period pushing you to stay in debt longer. Therefore, a partial loan repayment option is worthwhile considering.
There are several ways in which one can consider a partial repayment of a home loan. In case you have a large surplus in savings, you can consider a onetime significant partial prepayment that can help you close your loan early or within the desired duration of time considering that there are no further rate hikes. If you cannot afford to make a large one-time prepayment, the other option is to make annual prepayments. This is done by making an annual contribution towards partial prepayment of the principal loan amount each year. Depending on your financial position, it can be a fixed or variable amount every year. This along with paying increased EMIs on the principal amount can significantly reduce your loan tenure. The third method and by far the simplest to accelerate your home loan repayment and reduce interest cost is to opt in for a higher EMI. This method works for individuals who have been repaying home loans for quite some time. As far as what assets can be used for prepayments, one can look at liquidating fixed deposits, recurring deposits, surplus funds received via salary hikes, bonuses or other sources such as property sales and rental income.
Even with the increased tax rates, home loans come at one of the lowest interest rates when compared to other loan and credit options, while also coming with best tax benefits on both interest and principal repayment. If you belong to the highest income bracket, a Rs 2 lac deductible on interest can help you save almost Rs 60,000/- in taxes annually. But at the current interest level, any home loan with an outstanding of above Rs 25 lakh and a tenure above tenure will have a much higher interest payment during the year than Rs 2 lac, which will not help in any higher tax savings.
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