look news india
If you have taken a home loan on floating interest rate and despite the increase in interest rates in recent months, the amount of monthly installment (EMI) deducted from your bank account remains the same, then do not make the mistake of being happy thinking of it as a relief. Most home loan customers think that there is no additional burden on their pockets due to no increase in EMI, but the reality is exactly the opposite. Due to this hidden mathematics of the banking system, you unknowingly get burdened with additional interest worth lakhs of rupees. According to the guidelines of the Reserve Bank of India (RBI), whenever interest rates increase, banks silently extend the loan tenure instead of directly increasing the EMI, keeping in mind the monthly budget capacity of the customer. If you do not pay attention to this change in time, your 20 year home loan may stretch to 25 or 28 years.
When you take a home loan from a bank or Housing Finance Company (HFC) at a floating interest rate, your EMI every month is divided into two parts – the first part is of principal and the second part is of interest. In the initial years of the loan, a large part of the EMI goes towards paying interest and the principal amount reduces very slowly. As the interest rate on your loan increases due to increase in repo rate or bank’s internal benchmark rate (RLLR/MCLR), the total interest charged on your loan also increases. Since the bank keeps your EMI amount fixed, now almost the entire part of your EMI is spent only on paying the increased interest and the reduction of the principal amount almost stops. For example, if you have taken a home loan of ₹40 lakh at 8.5 per cent for 20 years and the interest rate increases to 9.25 per cent, then keeping the EMI constant may extend your loan tenure by about 3 to 4 years and you may have to pay an additional interest of ₹8 lakh to ₹10 lakh in total.
If you want to avoid the trap of this huge interest, you should immediately contact your home loan branch or send an official email to the customer care of the bank. Tell the bank in clear words that in case of interest rate increase, instead of increasing your loan tenure, they should reset and increase your monthly EMI. The Reserve Bank of India (RBI) has given clear instructions to all banks and financial institutions that in case of change in interest rates, they should give the customer the right to choose the option of increasing the EMI or increasing the tenure or a combination of both. When you increase the EMI by keeping the tenure fixed, your principal gets deducted every month as per the schedule, due to which not only does your loan end on time but you also save yourself from additional interest worth lakhs of rupees.
If your monthly income is not enough to afford the increased EMI, you still have other effective ways to save lakhs of rupees. The best solution is to make partial prepayment of the home loan whenever you have annual bonus, tax refund or any additional savings. Banks cannot charge any pre-payment charge on floating rate home loans. Adding just one or two additional EMIs to the principal amount every year reduces your loan tenure by several years. Apart from this, if your old home loan is still linked to Base Rate or MCLR, then apply to the bank to get it converted to Repo Linked Lending Rate (RLLR) immediately, because under RBI rules, customers get the benefit of interest rates in loans linked to external benchmarks with more transparency.
Under the transparency rules of RBI, it is now mandatory for all banks to send a detailed statement to the customer every quarter, clearly mentioning the principal amount paid so far, total interest, remaining EMI and the new maturity date of the loan. Customers should download and check their Amortization Schedule from time to time through mobile banking app or internet banking. If you notice that the number of remaining installments of your loan has suddenly increased, then immediately contact the bank and lodge an EMI modification request. A little vigilance and timely communication with the bank can save lakhs of rupees of your hard-earned money.