Prepaid sounds like a convenient option to get rid of your debt and interest liability. We all want to pay off our debts and free ourselves from long-term financial commitments. The RBI has recently raised the repo rate by 40 basis points, made loans more expensive and started speculating on how much the rate could rise.
A higher interest rate cannot be blown away as most floating interest rates are associated with debt repo rates. Let’s find out how your home loan should be repaid and how it will affect you in the long run.
How rising interest rates affect debt repayment
When the interest rate on your existing loan increases, you will receive two options from the lender: either EMI (option I in the figure below) or maturity (option II in the figure below). With the help of the diagram shown in the table below, let’s find out how your debt will be affected in both cases.
Impact on home loan EMI after interest rate hike
In either case, the borrower will pay more interest. However, if you keep the EMI the same and extend the term, the interest outgo will be higher. Debt repayment can be an effective tool to reduce the impact of rising interest rates on your loan.
In case of increase in interest rate, prepayment of loan
According to BankBazar, when interest rates rise, and you want to prepay the loan to avoid the emergence of excess interest over the term of the loan, the bank gives you various options to adjust your loan obligations. In the first option (case-1 in the example below), the EMI size remains the same, where the repayment period changes, resulting in lower prepayments and lower EMI numbers. In the second case (Case-II in Figure-II), the EMI size changes, where the maturity remains the same, but it requires a large prepayment and allows you to reduce the EMI size.
There are various prepayment options to save interest if the home loan interest rate goes up
You should be prepared with a proper payment strategy. There are several repayment options available to your lender that can help you save on interest and avoid financial stress. So, do not hesitate to discuss with your lender and get a more customized solution for yourself.