How Rising Interest Rates Are Pushing Home Loan Borrowers' EMI Repayment Beyond Retirement Years

Not once, twice or thrice, the RBI hiked the repo rate six consecutive times in the past 11 months. The back-to-back repo rate hikes, as expected, worsened the EMI burden for most borrowers, including those with home loans.

And the situation is such now that many home loan borrowers are left in an unenviable position, wherein the tenure of their home loans is getting stretched, leaving them with the responsibility to even keep paying the EMIs after retirement!

This comes amidst some banks in India automatically adjusting home loan tenures as interest rates increase, and borrowers are often unaware their loans have been extended.

Home Loan EMI Repayment Extending Beyond Retirement

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A Bloomberg report put forward a similar case. Abhishek Kumbhani and his wife Rashmita's housing loan term jumped to 60 years from 25, meaning Abhishek will be at least 90 if he follows the payment schedule.

¡°I felt like I was trapped,¡± the 30-year-old said in a phone interview from his home in Surat, Gujarat. ¡°I¡¯ve used all my savings and I can¡¯t get out of this.¡±

The Kumbhanis were caught by a reset clause in their loan contract that meant when the variable-interest rate on the mortgage they took out a year ago increased to 9.21% from 6.71%, the tenure was pushed out to keep their EMI repayments stable.

And sadly, they¡¯re not alone. More than 40% of the outstanding housing loans from banks and financial institutions in India, i.e. about 4.7 million customers owing Rs 8.2 trillion ($100 billion), have seen an increase in loan tenure, repayments, or both, according to State Bank of India¡¯s economic research wing.

People Share Ordeal On Twitter

Some users also took to Twitter regarding this issue.

Dear @RBI , Please look at the responses here. Some banks have extended home loan tenures way beyond retirement ages. This is not good practice for the bank's risk profile and borrowers should be encouraged to increase EMI to make it by retirement.

¡ª Deepak Shenoy (@deepakshenoy) March 15, 2023

My home loan interest rate went from 6.7 to 9.2. The tenure might overtake my life expectancy ??

¡ª t ?? (@fuckitrey) April 19, 2023

I had taken a home loan in Dec 2022 with my first payment starting in Jan 2021 for a tenure of 20 years.
Today when I checked, the tenure has gone up by 2 years. Also the monthly emi paid has increased over the time due to RBI repo rate increase
Why such cheating.

¡ª Raj Avlani (@avlaniraj) April 14, 2023

I had taken a home loan last month, Home loan. My tenure was extended for 6 months due to increase ROI. I request so many time through email to not increase my tenure pls increase my monthly EMI. but last one month not any resolution. Their customer care service is so bad

¡ª Pintu Singh (@PintuSinghCoach) April 11, 2023

How are banks allowed to do this? Utter nonsense

¡ª Deepak Shenoy (@deepakshenoy) March 15, 2023

Why Loan Tenures Are Being Stretched

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It¡¯s a reflection of what is happening in nations around the world as central banks aggressively tighten monetary policy and hike rates. Lenders, with the encouragement of governments and regulators, have reportedly been looking for ways to lessen the blow to borrowers from the massive surge in home loan rates, through lengthening of tenures, transferring to interest-only loans and restructuring debt.

In India, home loan borrowers are particularly exposed to changes in interest rates due to the larger presence of variable rate housing loans, compared with countries such as the US where most people have fixed-rate loans.

The stretching of loan tenures is also particularly surprising in a country like India where many people are debt-adverse and home loans are regularly paid off within an average of 8 years, according to fintech firm Bajaj Markets, as per the report.

It's noteworthy that Indian home loan lenders allow borrowers to maintain the original tenure of their loan if they increase EMI monthly repayments. This was an option the Kumbhanis initially explored despite Abhishek¡¯s uncertain income from working as a freelance web and mobile application developer.

In the end, Kumbhani, who saw his loan tenure extended to 60 years, managed to reduce it to 30 years in the last few weeks by increasing the repayments and partly paying some of the principal. But he hasn¡¯t discussed the issue in detail with his wife, Rashmita, fearing he¡¯ll upset her. ¡°That will only increase my stress,¡± he said.

¡°Both the banks and the borrowers are to be blamed for this situation,¡± said Mahesh Mirpuri, a mutual fund distributor and a social media commentator on financial issues, adding that some banks could have better communicated scenarios outlining what may happen when interest rates rise, while many borrowers could have done more research and been more cautious. In many cases borrowers went for the biggest house their eligibility at that time allowed, he said, as per the report.

Also Read: EMI vs Rent - We do the calculation for you

How To Lower EMI Burden Despite Repo Rate Hikes

Now comes the question, what to do?

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If you too are an existing home loan borrower, you can contact your lender and get the home loan tenure shortened if you do not wish to keep paying the EMIs for super long periods, especially after retirement. But do note that shorter tenure would imply a higher EMI amount as well, which you should be able to repay in case you make this decision. Also remember that the longer the loan tenure, the higher the overall interest cost on the loan.

In case you don't want to or are unable to get the loan tenure shortened or you are currently not in the position to pay the increased EMI that would come with shorter tenure, you can start accumulating money and go for loan prepayment whenever you have surplus funds. This too will be helpful in reducing the total interest cost on the home loan.

Else, you can also go for a home loan balance transfer to a lender offering a lower interest rate on your outstanding home loan. But ensure that your overall savings through balance transfer are significant and outweigh any fees/charges related to balance transfer. Online calculators are available for the same.

For understanding different ways to lower home loan EMI burden, click here.

Also Read: Does It Make Sense To Make Your Spouse The Co-applicant When Taking A Home Loan?