Over the last two years, interest on home loans has gone up by at least 200 basis points (100 basis points =1%), from about 8% to above 10%, even for those borrowers who have a good credit standing. When we calculate the approximate loan tenor after such an increase, the tenors can even go beyond 20 years.
For example, if you are in your 40s and have taken a home loan 3 years back, then, with the increase in the loan rates, your EMI payments will go beyond 240 installments i.e., 12 EMIs for each of 20 years. So, you as a borrower will be burdened by the loan repayment even after your retirement.
In such situations, banks call for a session with the borrower and place two options in front:
- Increase the EMI so that the its number comes down to below 240,
- Pay a lump sum which would reduce the borrower’s outstanding principal amount leaving the EMI amount unchanged.
Most banks and financial advisors suggest that it will benefit the borrower to make part prepayment of the principle amount as this will considerably help in reducing the loan tenor leaving the EMI unaffected. But, in certain situations, looking at the financial standing of the borrower it may not be possible to make such part payments, so borrowers opt for increase in the number of EMIs.
The rise in the FD rates of various banks also will help people to invest in short term deposits which mature in a span of 1 year and also provide the rate of about 9.25%. The increase in this rate will pull out savings from people and which in turn helps in regulating the economy thereby keeping it steady during these inflationary phases.