Whether To Pay Higher EMI Or Increase Tenure Article

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Whether to Pay Higher EMI or Increase Tenure

In case, you have borrowed a Rs 10 lakh home loan for 10 years, a half a percentage increase in interest rates will increase your equated monthly installment (EMI) by around Rs 290. The option of increasing the EMI seems beneficial when a rise in interest rates is expected.

Author: Aditya Jaiswal

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Should I Pay High EMI

In case, you have borrowed a Rs 10 lakh Home Loan in India for 10 years, a half a percentage increase in interest rates will increase your equated monthly installment (EMI) by around Rs 290. The option of increasing the EMI seems beneficial when a rise in interest rates is expected. In such a case, you have the advantage of not extending your loan tenure at higher rates. Also, it helps you to avail tax breaks on your increased interest outgo.

However, it does have its own disadvantages as well. Here, it is the pressure that the high EMI lays on monthly budget. You may require to compromise a little on your monthly expenditure to accommodate your EMIs. If you are financially over stretched, it may be better to keep the same EMI and increase the tenure.

Increasing the tenure of the loan

If interest rates go down in future, the borrower will benefit largely from this strategy whereas it would be the opposite if interest rates go up. In such a scenario when there is a constant rise in interest rate, increasing the tenure of the loan will have a direct impact on the cost price of home. Since the banks don’t extend tenure beyond retirement age, the option may not be available if the borrower is about to retire. Another problem is related the tenure. Some banks limit the maximum tenure, thereby not increasing the tenure beyond 20-25 years.

Prepayment of the loan

Prepaying the loan means paying a lump sum to reduce outstanding balance in so keeping the EMIs constant even if interest rates go up. Raising the kind of cash can a little difficult if the borrower already has stretched the budget to buy the house. In such a case, the borrower has to liquidate some of investments or pledge financial assets like an insurance policy or national savings certificate and get an overdraft facility that will allow the borrower to pre pay the loan amount.

Outlined below are some of the things to look at if choosing to pre pay the loan :

Ø Ensure that there is no penalty for the partial pre - payment of the loan

Ø Consider the loss of tax benefits as tax deductible interest payments lessen after pre-payment.

About Author

Aditya Jaiswal, advisor of home loans for NRIs, is an associated editor with the site: http://www.guide2homeloan.com. The site is an online portal to provide home loan advice on home loans in India including types of home loans in India, home loan interest rates in India provided by home loan providers in India.

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Whether to Pay Higher EMI or Increase Tenure