Rising interest rates hit you hard? Here’s how to make sure your mortgage is paid off before you retire

• you can your EMI up to 40-50% of your income.
  
• Prepayment should only be considered if one has sufficient savings.
  
• Only consider refinancing if you can get at least 50 to 100 basis points off your current loan.

Home loans are long-term loans that usually have a term of 15 years or more, and interest rates can go up and down during this period.

However, a recent series of rate increases has been a nightmare for mortgage borrowers. Between May 2022 and February 2023, the Reserve Bank of India (RBI) raised the repo rate by 250 basis points. New home loan borrowers who borrowed under the External Benchmark-Based Lending Rates (EBLR) have seen their home loan interest rates rise the fastest in line with the rise in repo rates.

When rates rise or fall, it is common practice in the industry to change the term of the loan as it suits the customer. “However, customers who do not want their loan term increased can approach their lender and increase their EMI or even increase their EMI part and part. There is no cost to change the EMI or term of office,” said HDFC General Manager Renu Sud Karnad.

She adds that most lenders, including HDFC, have a process in place that if the term extension exceeds a certain comfort level, the customer is informed of the need to review the EMI. Therefore, it is advisable for the customers to also stay in touch with their lenders.

What consequences will the recent interest rate hikes have for you?

Theoretically, an increase of 2.5% for a loan with a term of 15 years from 7% to 9.5% means that the term increases by 90 months or 7.5 years. “For a longer term, such as 20 or 25 or 30 years, the additional term can be up to 20 additional years depending on the interest rate,” says Adhil Shetty, CEO of BankBazaar, an online financial marketplace.

Since interest rates on home loans have risen significantly since last year, lenders prefer to raise the EMI to ensure that the term does not increase by more than a few years. “If you’re in the middle of your repayment period and have more than twice the term of office left to retire — say you’re halfway through your 20-year loan and in your late 30s or early 40s — the lender may extend your tenure instead of of your EMIs, especially if you’ve prepaid your loan,” says Shetty. However, if you’re in your late 40s or early 50s, you should close the loan by the time you retirement age.

What you can do

In such a situation, a borrower has several options open to him.

Raise the EMI: If the borrowers have a significant portion to pay off, they can increase their EMI until they are 60 to 65 years old (depending on their lenders). “In these cases, borrowers can raise their EMI by 5% once a year. This annual exercise will extend your tenure and give you a little more room to pay off the loan amount,” said V Swaminathan, executive chairman of Andromeda Loans, a loan distributor. As a rule of thumb, your EMI for a home loan should not exceed 35-40% of your income. Even if you stretch this, most banks will limit your EMI for home loans to 50% of your income. Thus, it is not feasible to raise the EMI above a certain point.

Pay your home loan in advance: Another possibility is to repay the home loan early, which means that you pay part of the loan amount earlier than the planned repayment term. “In the event that raising one’s EMI is not possible, one option is to strategically prepay to mitigate the impact of the rate hike. Prepayment should only be considered if one has sufficient savings. If the customer doesn’t have enough savings, they can instead focus on making small down payments every year to save more on the home loan,” said Pramod Kathuria, founder and CEO of Easiloan, a digital marketplace for home loans.

However, of the 5.5 million home loans associated with EBLR, only 0.82 million have the option to make prepayments to ensure their tenure or EMIs don’t skyrocket, according to an analysis of SBI research. Those unable to pay off their home loan early can consider other options for paying off their home loan before retirement.

Get a co-applicant: “If you’re nearing retirement but still haven’t repaid a significant portion of your loan, you could try getting a co-applicant or a guarantor,” Swaminathan adds. If the co-applicant retires at a later stage, the bank can be convinced to extend the employment.

Refinance your home loan: Another option is to refinance your home loan. Some lenders have lowered interest rates on their home loans due to reduced demand. “If your current rate is 0.5-1% higher than the prevailing rates, refinancing your loan to a lower rate may be a good idea. Refinancing at a lower rate and repaying a higher EMI would be even better. Check with your own lender before refinancing, as this may be an easier option,” says Shetty. Having a co-applicant with a good credit score and steady income can help you get lower interest rates.

Home loan borrowers may also be wondering where interest rates are headed. “In terms of interest rates, in my personal view, we are almost at the end of the cycle of rate hikes as factors like inflation could fade away as crude oil prices, which have the largest impact on inflation in India, have fallen to a level of 15 percent. lowest month,” says Karnad.

There is no one right option for paying off your mortgage before you retire. It depends on your financial situation and the extra monthly outflow you can take out. You can choose one or all of these options at once, depending on what you can afford.

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