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Loan: People also take help of home loan to buy a house. At the same time, due to continuous increase in interest rates last year, the tenure of most home loans has increased. However, some borrowers will now have to repay the loan until retirement. When interest rates rise, banks usually increase the loan tenure to protect borrowers from rising equated monthly installments (EMIs).
However, sometimes these extensions last for a long time and start hurting the borrowers due to higher interest. Keeping in mind the plight of borrowers, the Reserve Bank of India (RBI) has recently come up with a set of repayment rules to empower home loan borrowers. What is new in this and how will it benefit home loan takers? let us know…
Home Loan: Increase in EMI or increase in tenure
When interest rates rise, lenders usually prefer to extend the loan tenure rather than increasing the EMI. As of now, tenure extension is the default mechanism for lenders in case of rate hike. Lenders often apply such decisions across the board rather than examining the repayment capacity of each borrower separately. Extension of loan tenure has its own cost as borrowers have to spend a lot of money on interest payments. Therefore, even this seemingly less burdensome option turns out to be very costly for borrowers.
New order of RBI on home loan
Resetting the interest rates on home loans, the RBI in a notification issued on August 18, 2023 asked lenders to provide the option to increase EMIs or extend the loan tenure or use both the options together.
1) Lenders should inform borrowers about the possible impact of changes in benchmark rates, which may lead to changes in EMI/tenure or both.
2) At the time of interest reset, borrowers should be given the option to switch to a fixed interest rate. All applicable charges for switching from floating to fixed should be disclosed in the loan approval letter.
3) Borrowers should be given the option to extend the loan tenure or increase the EMI or both.
4) Lenders should ensure that the increase in tenure is not negative, i.e. the monthly loan repayment should not be inadequate to cover the increased interest rate on the loan. This means that banks cannot take unilateral decisions on certain aspects of the loan without taking the borrower into confidence.
RBI’s new rule on home loan
RBI has directed banks to share easily understandable loan details, including the total interest and principal taken so far, the annual interest rate on the outstanding loan, the EMI amount and the number of EMIs remaining after each quarter. Now borrowers will have the option of increasing interest rates. Banks will have to give borrowers an opportunity to decide whether they want to extend their loan tenure, increase EMIs or adopt a combination of both options. However, as banks start operating it, the situation will become clear.
Let us understand the new rule with an example.
Suppose you invest Rs. Start a home loan of Rs 50 lakh. At the time of taking the loan, your monthly EMI was Rs 38,765. Total interest Rs. Will be Rs 43.04 lakh. Suppose after three years the interest rate increases to 9.25%. According to the new order of RBI, banks will have to give you the option of increasing your EMI or tenure or a combination of both while resetting the interest rate. If you want to repay your 20-year loan over the remaining tenure of 17 years (assuming 3 years have passed), your EMI will be Rs 44,978 per month. At the end of the loan tenure, you will get a total of Rs. Will have to pay. Interest of Rs 55.7 lakh will have to be paid.
interest on loan
However, if you choose to extend your loan tenure and your loan EMI at loan commencement will be Rs. 38,765, on the other hand the loan will continue for 321 months or 26 years and 10 months. Your total interest payment at the end of the loan tenure will be Rs 88.52 lakh. If you opt for a longer tenure instead of a higher EMI in this case, you will have to pay an additional interest rate of Rs 33 lakh. In such a situation, increasing the loan EMI is a better option to save this extra money.
Rule
With the RBI order, banks are now required to provide clear options to borrowers to increase their EMIs or extend their loan tenure or both, making it more accessible to borrowers. Banks are expected to provide this flexibility on a regular basis, so that borrowers have more control over their loan repayments.
keep this in mind
Experts say individuals should avoid opting for unusually high growth as it will eventually deplete cash in hand. Increasing the tenure will reduce the EMI and give more flexibility to the borrower in monthly budget. However, this will result in paying higher interest during the loan tenure. The borrower should carefully evaluate whether this is the right choice for him or her in the long run.
