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With EMIs set to go up should you increase your tenure
Is it wise to increase your tenure or EMI
With the Reserve Bank of India (RBI) increasing the repo rate by 40 basis points due to high inflation levels, the EMIs of loan holders is set to increase
In the case of home loans the impact would be higher. Home loans are on a floating basis where any such hike is passed on to the borrower
All floating rate home loans taken after October 1 2019 are linked to an external benchmark as per the mandate of the RBI
Since most banks have selected the repo rate as the external benchmark, a hike in repo rate will most likely mean an increase in the interest rate for loans
Banks are mandated to revise their external benchmark based lending interest rates once in three months to bring them in line with the external benchmark they are linked to
When the interest rates go up, customers tend to increase their tenure rather than increasing the EMI amount. However this is not economical for the borrower especially in the long run.
Since the repo rate hike is not substantial, the longer you keep your tenure, the higher the amount of interest you end up paying is higher.
If you can afford a higher EMI then it would help keep the interest cost lower and you can close your loan sooner.