Very important question for existing home buyers is why home loan tenure increases automatically? What can be done to reduce the loan tenure? Let’s answer these questions in this post.
Home Loan Tenure Increases automatically on your existing loan because of the increase in home loan interest rate. Recently we have seen the hike of around 2.5% in existing home loan interest rates (going from 6.85% to 9.5% within 1 year), due to which either EMI or tenure needs to be increased to recover the extra interest amount. So Banks choose to increase tenure of your home loan in such cases.
- Why Home Loan Tenure Increases when Interest Rate Increases Video
- How much Tenure increases with interest rate?
- Download Home Loan Tenure Calculator
- Who decides the tenure for home loan?
- How to reduce home loan tenure and Save Interest?
- Can banks increase loan tenure?
Watch below video to know how much home loan tenure can increase with increasing interest rates.
Why Home Loan Tenure Increases when Interest Rate Increases Video
Watch more Videos on YouTube Channel
How much Tenure increases with interest rate?
Let us take an example of how much loan tenure can increase with increasing interest rates. Below are the details of the example:
Home Loan Amount = Rs. 30,00,000
Interest Rate = 6.9% (initially)
Tenure = 15 Years
So for above example, your home loan EMI is Rs. 26,797.40, total interest you pay is Rs. 18,23,533, principal pay back is Rs. 30,00,000 and total loan tenure is 180 months as can be seen below:
Note that the months value is starting from 0 for EMI calculation purpose.
Now let’s say the interest rate increased to 7.5% after 1 year of your loan. So instead of 6.9% from 13th month onwards, you will pay 7.5% interest rate and below are the details:
We can notice two important things above:
- Loan Tenure increased to 190 months (increase of 11 months in tenure)
- Total Interest you have to pay now is Rs. 21,17,511 (increase of Rs. 2,93,978 in interest you will pay)
So this is the impact of home loan interest rate increase. Your EMI is kept same as can be seen above, but the loan tenure increases to recover the extra interest amount you need to pay due to interest rate increase.
When interest rate decreases, the reverse is possible – that is home loan tenure also decreases, but this is a rare case to see decrease in interest rates.
Further when we increase the interest rate to 8.5% after 2 years of loan, your loan tenure increases to 212 months and total interest amount becomes Rs. 26,54,773. Difference of 32 months and Rs. 8,31,240 extra interest from initial tenure and interest amount.
ALSO READ: Home Loan Variable Interest Rate Calculation
Download Home Loan Tenure Calculator
You can download the home loan EMI and Tenure Calculator in excel and check how many extra months of EMI you need to pay as a result of interest rate increase.
Fill below details to download home loan tenure calculator:
Who decides the tenure for home loan?
Home loan tenure is not decided but calculated on existing loans. Based on the interest rates increase or decrease, the loan tenure is adjusted accordingly to recover the extra interest amount to be paid.
When RBI increases repo rate, that is the time when banks also are forced to increase interest rates, specially in home loans.
Repo rate is the rate at which banks can take loan or borrow money from RBI.. So if banks are borrowing at higher rate, it passes some burden to us as well in the form of loan interest rates hike.
ALSO READ: Home Loan Mistakes to Avoid
How to reduce home loan tenure and Save Interest?
So important question is how to reduce home loan tenure and save interest when tenure and interest rates are increasing with time.
You can make Home Loan Prepayments to save loan interest and reduce tenure of your loan.
What is Home Loan Prepayment?
- Loan prepayment is a method to pay extra amount in your loan account
- You can save and accumulate this extra amount in the form of Recurring Deposits or doing SIP (Systematic Investment Plan) in Debt Mutual Funds
- Doing home loan prepayments reduces the total principal balance remaining in your account, which in turn reduces the interest amount you need to pay
- This will also reduce the loan tenure since you are paying some principal amount back before time in your home loan
- While doing prepayments, you have 2 options – Either to reduce EMI or reduce Tenure
- You should keep EMI same and reduce tenure to save more interest
Watch below video to know more examples about loan prepayments and why you should reduce tenure instead of EMI:
Watch more Videos on YouTube Channel
Can banks increase loan tenure?
Yes banks can increase loan tenure when home loan interest rates increase.
As seen above with examples, banks are forced to increase interest rates due to increase in repo rate by RBI. So you can make loan prepayments in order to reduce loan tenure and save interest by reducing the principal outstanding balance against your loan.
So to conclude, below are the points we discussed:
- Your home loan tenure increases automatically, due to increasing interest rate in home loan
- You can download the home loan tenure and EMI calculator in excel to know how much tenure increases in your loan
- Also home loan prepayments can help you to save loan interest amounts and close loan before time
- While making prepayments, you should reduce tenure and keep EMI same (if affordable) in order to save more interest on home loan
Comment below in case you have any queries or want to share about your home loan interest rate or tenure increase.
Some more Reading:
- Home Loan Income Tax Benefits
- Home Loan Prepayment Reduce EMI or Tenure
- Car Loan Floating Interest Rate Calculation
- Rs. 1000 SIP vs RD Calculation [For loan prepayment Saving]
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