Home Loan: Follow this RBI New Rule, Save Rs 30 Lakh of Rs 50 Lakh Home Loan
Banks usually extend the loan tenure to protect borrowers from EMIs when home loan interest rates increase. While this may seem beneficial to borrowers at the moment, it will have to pay interest in the long run.
The Reserve Bank of India (RBI) has provided some facilities to save borrowers from this problem. The option of increasing the EMI, extending the loan tenure or rescheduling the interest rates on home loans has been used together. So let’s see how this rule is beneficial to borrowers and how it can be used, what is new in it and how it benefits home borrowers.
General criteria of Increase or extension of EMIs:
When the interest rate increases, banks usually want to extend the loan tenure instead of increasing the EMI. So far, in case of rate hike, banks have no option but to extend the term. Banks implement tenure extension decisions instead of individually checking the borrower’s repayment capacity. Borrowers will not face the problem of immediate increase in EMI due to this.
But it is a fact that the borrowers are burdened with interest for the extension period. The best solution for this is to increase the EMI. This is a new facility made by RBI. You can go to the lending banks and ask them to increase the EMI instead of extending the tenure.
In a notification issued on August 18, 2023, the RBI has asked banks to allow borrowers to either increase EMI or extend loan tenure or use both options together while resetting interest rates on home loans. ‘
1) Banks should inform borrowers about the potential impact of changes in benchmark rates leading 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. Details of all charges applicable for switching from floating to fixed interest should be disclosed in the loan sanction letter.
20) Borrowers should be given the option of extending the loan tenure or increasing EMIs or both.
4) Banks should ensure that extension of tenure does not lead to negative amortization. That means the monthly loan payments must cover the accruing interest rate of the loan.
According to the above new rules, banks will not be able to take unilateral decisions on certain aspects of the loan without taking the borrower into confidence. Due to this, the home loan borrowers have got an opportunity to take their decisions in this matter.
The RBI has directed banks to share an easy-to-understand loan statement detailing the total interest and principal collected so far, the annual interest rate of the outstanding loan, the EMI amount and the number of outstanding EMIs after each quarter.
How Does New Rule Help You:
Borrowers get a choice when the interest rate is increased. Banks have to give borrowers an opportunity to decide whether they want to extend their loan tenure, increase EMI or go for both options.
You can borrow Rs 50 lakh in 2020 for 20 years (240 months) at 7% interest. Your monthly EMI at the time of taking the loan is Rs 38,765. Total interest is Rs 43.04 lakh. Suppose the interest rate is increased to 9.25% after three years. As per the new RBI order, banks will have to give you an option to either increase your EMI or tenure or a combination of both while resetting the interest rate.
If you want to complete your 20 year loan within the remaining 17 years (assuming 3 years have passed), your EMI will be Rs 44,978 per monthrises to At the end of the loan period you will have to pay a total interest of Rs 55.7 lakh.
If you choose to keep the loan EMI at Rs 38,765 as it was when the loan was initiated – the loan will continue for 321 months or 26 years and 10 months. Your total interest payment at the end of the loan period will be Rs 88.52 lakh. If you opt for longer tenure instead of higher EMI, you will have to pay an additional interest rate of Rs 33 lakh.
Do you need to increase the home loan EMI or extend the tenure?
A home loan borrower must first decide whether increasing the EMI or extending the loan tenure is a better option when interest rates rise. If you decide to increase the EMIs, you should ensure that the repayments are within the capacity.
If you decide to extend the term, you need to know whether you can pay the additional interest payable in the long run. Try to prepay as much as possible without affecting your daily expenses. The higher the prepayment, the lower the balance amount and the lower the interest charges.