Home loan borrowers: Pay higher EMI every month or extend your loan tenure? How to choose after a rate hike

A rise in home loan interest rates presents borrowers with a choice that can affect their finances for years. They can increase their equated monthly instalment (EMI) to repay the loan faster, or extend the repayment tenure to keep monthly outgo under control. While the second option offers immediate relief, it can increase the total interest paid over the life of the loan.

The right decision depends on a borrower's income stability, existing financial commitments, savings and the number of years remaining on the loan, said Mehernosh Tata, managing director and chief executive officer of Godrej Housing Finance.

“Those with stable income and sufficient room in their monthly budget may consider increasing the EMI to limit the additional interest cost. Others may prefer extending the tenure to keep their monthly outgo manageable, while recognising that this will increase the overall cost of the loan,” Tata said.

How a 25-basis-point rate hike affects your home loan

Consider a borrower with a ₹50 lakh home loan and a 20-year repayment tenure. If the interest rate rises from 8.5% to 8.75%, the monthly EMI would increase from ₹43,391 to ₹44,186, an additional ₹795 a month, according to calculations provided by Tata.

The increase in the interest rate would also raise the total interest payable over the loan tenure from approximately ₹54.14 lakh to ₹56.05 lakh, assuming the revised EMI is paid over the original 20-year period.

Borrowers should assess this additional cost alongside their monthly cash flows before deciding how to respond to a rate reset. Those who can comfortably accommodate the higher EMI may be able to limit the additional interest burden by retaining the original tenure.