Defer, reschedule or switch loan if EMIs have increased: Experts

The Reserve Bank of India’s (RBI) Monetary Policy Committee hiked the repo rate by 50 basis points (bps) on June 8, after a 40-basis-point increase in May. According to a recent Knight Frank India report, home loan rates are still approximately 150 bps below 2019 levels. A reversion to those levels would result in an 11.7 per cent increase in the homebuyer’s equated monthly instalment (EMI) load.

Adhil Shetty, chief executive officer (CEO) of BankBazaar.com, says, “After the US Federal Reserve’s rate hike of 75 bps, the RBI could undertake more rate hikes. Given this situation, borrowers should list all their repayment options for existing loans and make course corrections wherever required.” 

Here are four ways to deal with a rising EMI burden, all of which will, however, require hard negotiations with the lender.

Reschedule the loan

If you opt for this you will have to request your lender to increase the loan tenor and reduce the EMI. V Swaminathan, executive chairman, Andromeda and Apnapaisa, says, “Rescheduling can prove beneficial for those who have multiple loans running simultaneously. It will allow them to manage their EMIs according to their budget.”

For instance, for a Rs 50 lakh loan at 7.5 per cent interest with a tenor of 15 years, the EMI comes to Rs 46,351. After a year, if your interest rate increases to 8.5 per cent, your new EMI will become Rs 48,176 for the remaining tenor of 14 years. But if you increase the tenor to 20 years, your EMI will reduce to Rs 42,456 even at 8.5 per cent interest rate.

Swaminathan says, “Most lenders charge only a nominal processing fee for rescheduling, but whether they allow it depends on their discretion.”

Such rescheduling will, however, increase the total interest cost you pay to your lender over the entire tenor.
 

Deferment

If you expect a lump sum in the near future, you can request your bank to allow you to not service the entire EMI. Alternatively, you could request your lender to allow you to not pay the principal while you continue to service the interest. You will have to promise to repay the outstanding amount for the period of the deferment, once you receive the lump sum.

Shetty says, “A debt deferment is when you do not need to repay the outstanding amount on a loan for a specific period. This can be in the form of the moratorium offered by the RBI in 2020, or it can be built into the product itself, as in the case of education loans.”

While deferment gives you some breathing space, it comes at a cost. Shetty says, “In most cases, a simple interest will be charged on the outstanding amount before you begin the repayment.”

Switch to a lower-cost loan

Another option that will allow you to reduce your EMI is to switch your loan to another lender offering a lower interest rate.

Raj Khosla, founder and managing director, MyMoneyMantra.com, says, “Borrowers can switch after a rate hike to take advantage of a potentially lower rate of interest. Depending on the rate differential, savings can be significant for the borrower.”

For a 20-year home loan of Rs 75 lakh, a rate differential of 50 bps can result in a saving of Rs 5.5 lakh in interest cost. Switching makes more sense for those who have a longer tenure left.

Remember that switching carries a cost. Khosla says, “There is no prepayment penalty on floating-rate home loans. Nominal or zero switching fee is applicable to customers having a high credit score. But there are other costs, which you need to take into account while calculating the benefits of this move.”

Finally, if you have a good credit score, your chances of being able to avail one of the above-mentioned options is higher.