Home loan: EMI and tenure

Home loan: EMI and tenure
4 Nov, 2007, 0511 hrs IST,Kavita Sriram, TNN

There was euphoria and expectation. Everyone hoped that the rates would come crashing down. Very much like how the rates peaked steadily with every Reserve Bank of India (RBI) move, the anticipation of a fall was huge. New borrowers were offered lower rates compared to existing borrowers. And Devansh was certainly unhappy and upset.

Three years ago, he procured a home loan of Rs 20 lakhs. The tenure of the loan was 10 years. The rate of interest was a humble eight percent. His monthly EMI outflow was a reasonable Rs 24,000. Today, the interest rate stands at a whopping 13 percent. This translates to a monthly outflow of Rs 30,000. Devansh contacted his bank to find out if any rate cut was being planned for existing borrowers and their answer was ambiguous.

The burden of unanticipated increase in monthly EMIs caught Devansh off guard. He had planned his monthly expenses and other financial commitments. Now, it had all gone for a toss. He had to rework on his finances, take stock of his assets and explore any changes to the structure of his home loan. The two most obvious options before Devansh are pay higher EMI or increase the tenure of the loan.

Some borrowers may feel more comfortable paying higher EMIs to the lender. This way, one does not need to prolong the loan period and bear the brunt of increased rates. Anxious borrowers are keen to repay their dues as soon as possible, as they fear defaulting in case the rates increase to an unaffordable level.

Paying off the home loan gives borrowers peace of mind. Perhaps, increasing the EMI is the best option in case further increases in interest rates is on the cards. This option is not for those who are already over-burdened with EMI repayments and cannot stretch their finances beyond this.

For those who are paying heavy EMIs, remember that in future, in case you need some more money from a lender, you may not be eligible for it. This is because the bank realises that your debt is heavy and bulk of your earnings is set aside for servicing your existing home loan.

Borrowers, who increase their monthly dues to the lender, agree to bear the increased cost of home loan immediately rather than postpone it to an indefinite future. Before increasing your EMI commitment, see if you can manage repayments with ease. A very tight lifestyle and a tight financial position can increase stress and make your life difficult.

If you anticipate a drop in rates in the future, increasing the tenure may not be a bad idea after all. On the contrary, if rates travel northwards borrowers who increase their tenure can end up shelling out more to the lender.

You can benefit from the strategy of increasing the tenure only if rates come down. Otherwise you'll be bound to an expensive financial commitment. Some banks do not allow borrowers to increase their loan tenure beyond a fixed period say 20 or 25 years.

Others see to it that the borrower repays the loan before he retires. Hence, his retirement age, will decide how much his tenure can be extended. Before taking any of these crucial financial decisions, borrowers must consult their financial advisors or professionals.