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RBI Rules for Home Loans: How to Save on Interest Costs in Rising Rate Scenario | Business helobaba.com

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New RBI rules for home loans: Rising interest rates over the past year have led to longer home loan repayment periods for many borrowers. Some are now facing the prospect of repaying their loans well into retirement. Typically, when interest rates rise, banks extend the loan tenure to prevent borrowers from facing higher monthly payments. However, these extensions can sometimes last for a significant period, resulting in increased interest outflow for borrowers.In response to this issue, the Reserve Bank of India (RBI) last year introduced new repayment rules to help home loan borrowers.
Home loan: Should you increase EMIs or extend the tenure?
When interest rates go up, lenders typically opt to extend the loan’s duration rather than increasing the monthly payment amount. Extending the tenure has been the standard practice for lenders in response to rate hikes until now.
Lenders commonly apply these changes uniformly instead of assessing each borrower’s ability to repay individually. This has been a usual practice so that the borrowers do not feel the pinch of a hike in EMIs immediately.
However, extending the loan tenure comes with its drawbacks, as borrowers ultimately pay more in interest. Longer loan terms result in higher total interest payments and keep borrowers in debt for a longer period.
Borrowers who prefer to increase their EMIs rather than extending the loan duration must contact their lender to request this change.
New RBI rule on home loans: What has changed?
Recognising this challenge, the RBI issued a notification on August 18, 2023, mandating lenders to provide borrowers with options to adjust their EMIs or extend the loan tenure, or both, at the time of resetting interest rates on home loans.
  1. Lenders must inform borrowers about how changes in benchmark rates could affect EMIs, tenure, or both.
  2. Borrowers should have the option to switch from a floating to a fixed interest rate during interest resets, with all associated charges disclosed.
  3. Borrowers should be able to choose between extending the loan tenure, increasing EMIs, or both.
  4. Lenders must ensure that extending the tenure doesn’t lead to negative amortisation, where monthly payments are insufficient to cover accruing interest.

This implies that banks cannot make decisions about certain aspects of a loan without consulting the borrower.
The RBI has directed the banks to share an easy-to-understand loan statement that explains the total interest and principal recovered till date, annualised rate of interest for the remaining loan, the EMI amount, and number of EMIs left after every quarter.
New RBI rule on home loans: How will it benefit you?
With the new regulations, borrowers will have a say when interest rates rise. Banks must allow borrowers to choose whether to extend their loan tenure, increase their EMI, or adopt a combination of both options.
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ET explains this scenario on how the new RBI rule can benefit a borrower:
Assuming you took out a home loan of Rs 50 lakh at a 7% interest rate for 20 years (240 months) in 2020. Your monthly EMI was Rs 38,765, and the overall interest payable was Rs 43.04 lakh.
Now, let’s say the interest rate increases to 9.25% after three years. According to the new RBI mandate, banks must offer you the option to either increase your EMI, extend the loan tenure, or use a combination of both when resetting the interest rate.
If you aim to repay your loan within the remaining 17-year tenure (considering 3 years have passed), your EMI will increase to Rs 44,978 per month. By the end of the loan term, you will have paid a total interest of Rs 55.7 lakh.

If EMI increases and loan tenure remains the same
Home Loan Rs 25 lakh Rs 50 lakh Rs 75 lakh Rs 1 crore
EMI @ 7% for 240 months Rs 19,382 Rs 38,765 Rs 58,147 Rs 77,530
Total interest payable at 7% Rs 21.52 lakh Rs 43.04 lakh Rs 64.55 lakh Rs 86.07 lakh
Interest paid in 36 months (Rs Lakh) Rs 5.06 lakh Rs 10.12 lakh Rs 15.18 lakh Rs 20.24 lakh
Loan balance after 3 years Rs 23.08 lakh Rs 46.16 lakh Rs 69.25 lakh Rs 92.33 lakh
EMI @ 9.25% for 17 years Rs 22,485 Rs 44,978 Rs 67,466 Rs 89,956
Remaining interest payable at 9.25% Rs 22.79 lakh Rs 45.58 lakh Rs 68.38 lakh Rs 91.17 lakh
Total interest payable in case of EMI increase (A) Rs 27.85 lakh Rs 55.7 lakh Rs 83.56 lakh Rs 1.11 crore

If EMI remains same and loan tenure extends
Home Loan Rs 25 lakh Rs 50 lakh Rs 75 lakh Rs 1 crore
EMI remains same throughout the tenure Rs 19,382 Rs 38,765 Rs 58,147 Rs 77,530
If EMI remains same, new loan tenure will be (months) 321 321 321 321
Revised interest payable Rs 39.3 lakh Rs 78.4 lakh Rs 1.17 crore Rs 1.56 crore
Total interest payable (B) Rs 44.36 lakh Rs 88.52 lakh Rs 1.32 crore Rs 1.7 crore
Net interest savings (B-A) Rs 16.5 lakh Rs 33 lakh Rs 49.5 lakh Rs 66 lakh

Alternatively, if you choose to maintain your original EMI of Rs 38,765 and extend the loan tenure, the loan will continue for 321 months or 26 years and 10 months. However, your overall interest payment will amount to Rs 88.52 lakh at the end of the loan term. This means you’ll pay an additional interest of Rs 33 lakh by opting for a longer tenure instead of a higher EMI.
Should you raise your home loan EMI or lengthen the tenure?
When faced with the decision of whether to increase the EMI or extend the loan duration due to a rise in interest rates, home loan borrowers should consider their financial situation carefully.
If opting to increase EMIs, borrowers should ensure that the higher monthly payment is manageable within their budget and repayment capacity. It’s important to avoid choosing an excessively high increase that could strain finances and deplete available cash reserves. Taking this cautious approach will help borrowers avoid financial hardship and maintain stability in their day-to-day expenses.
Extending the loan period lowers the monthly payment, giving borrowers more financial flexibility. However, it means paying more interest overall. Borrowers should consider carefully if this is the best choice for them in the long term.
Paying off loans early is a proven way to reduce overall interest payments. This strategy is most beneficial when lenders impose minimal or no prepayment fees. Aim to make extra payments without compromising daily expenses. The more you pay upfront, the less you owe, leading to lower interest costs and more affordable EMIs.
Borrowers should use annual bonuses or unexpected windfalls to pay off loans whenever feasible. However, individuals should first evaluate their financial situation regarding meeting essential financial objectives before committing to loan prepayment. If income rises, experts recommend increasing the EMI amount to expedite loan repayment.

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