Higher Home Loan EMI or Longer Repayment Tenure: What Should You Choose

While most of us have aspirations of buying our own house one day and in order to realise that dream, we try to save a significant portion of our monthly income and also try to generate income from additional sources. But the quest to buy your own home is literally a race against time, as the prices of the residential real estate are on an upward trend.

So, it might happen that by the time you think you have saved enough for the purchase of a house, you end up ruing your luck as the prices have increased further and are beyond your reach again. So, you reconcile yourself to the fact and get back to saving more money. But is there any guarantee that by the time you have saved enough, the prices would not have increased further. As such, rather than waiting for the real estate prices to fall, you must take the matter into your own hands and explore other alternative sources of funding that can help you make an immediate purchase. This is where Home Loans come to your rescue.

Why Home Loans?

Home Loans are amongst the most popular borrowing options for prospective home buyers who do not have enough money to make an outright purchase. Home Loans are provided by many financial institutions in India and are meant for purchase of residential properties only. While Applying for a Home Loan, you need to provide only the margin money (10-25% of the purchase value, based on the loan amount),and the rest would be financed by the financial institution for a maximum duration of 30 years with the rate of interest starting from 8.35%. As the Home Loan is a Secured Loan, so the property purchased with the loan amount must be hypothecated with the lender, who will create a charge over it. The charge would remain in place unless you repay the entire loan amount.

In order to apply for a Home Loan, you can take the online as well as the traditional offline route. With the online mode, the whole process is sped up as it requires minimal documentation and if your profile meets the requirements of the lender, the application would be approved immediately, and the loan amount would be disbursed within a few days, after the legal and technical report.

Higher Home Loan EMI or Longer Tenure

When it comes to repayment of your Home Loan there are two critical factors that need to be considered:

• The Home Loan EMI (Equated Monthly Instalment)
• Repayment Tenure

When you avail a particular amount as your Home Loan, the lender extends the facility to you at a particular rate of interest. Then the entire amount that has to be paid by you with the specified tenure.Principal + interest is divided by the tenure opted by you,and the amount that comes out is your EMI. You have to pay the EMI for the entire tenor as agreed and only when you have repaid the entire amount, would your loan be considered settled.

When you are serving the Home Loan EMIs, there are two possible situations that may arise, other than the normal:

• It might happen that your financial situation has strengthened, and you can afford to serve higher EMI amounts that can help to settle your loan account earlier and also help you to save on the interest cost.
• It is also possible that your financial situation is a little shaky and you are unable to serve the higher EMI amount, in such a case you can opt for a longer tenure, which would reduce the amount of every instalment but would mean that you would be paying higher interest amounts.

From the above analysis,it is obvious that both these situations have their own pros and cons, so in order to choose the best possible option for you, you need to consider the following factors:

1. Age

You need to consider the number of working years you have left with you while taking this decision. If you are under 30 years of age and have almost 30 more working years, then you can afford to go for a longer tenure to reduce the burden of EMIs, but if you only have 10-15 years of working life left, then you must opt to increase the EMI amount so that the loan amount can be repaid prior to your retirement.

2.Financials

You must keep a close eye on your financial situation and take a decision accordingly. If you feel that your income has increased, and you can afford to repay higher EMI amounts, then you must do so immediately as it would help in savings interest expenses, but if your financial situation is deteriorating, then you must try to reduce the EMI burden by going for longer tenure.

3.Tax Benefits

Under Income Tax Laws, you are eligible for a tax rebate on interest as well as principal repayment against a Home Loan. So, you must do a cost and benefits analysis before taking a decision,e., whether the tax savings are more important, or savings of interest cost are more important. If you want to have more tax savings, then the better option for you is to extend the repayment tenure.

4.Prepayment Clause

You need to read your loan agreement thoroughly and find out about the prepayment clause. Usually, the lenders do allow part payment or pre-payment without any charges. But if there are any charges involved, it must be analysed if repayment of the Home Loan earlier than the agreed scheduled attracts significant charges which outweigh the savings on interest cost.

5.Interest Rates

Home Loan interest rates are directly linked with the (the marginal cost of funds based lending rate) MCLR. So if the MCLR against your Home Loan has reduced, then you must increase the Home Loan EMI amount as you can afford that increase and the loan could be repaid earlier saving your interest expenses, but if the interest rates rise then you must opt for a longer tenure so that you are able to afford the EMIs.

The decision regarding increase in Home Loan EMI or opting for a longer tenure depends on a number of factors, but the essence of the matter is that if you are able to repay the loan amount earlier than the agreed schedule, the savings on interest cost are going to be significant.