Increase in EMI vs Increase in home loan tenure

 

 

The consistent hike in interest rates by Reserve Bank of India (RBI) has hit the home borrowers hard. Banks prefer to increase the tenure by a few months or years in order to accommodate the rate hikes than to increase the EMI. Borrowers also like increase in tenure than in EMI as their budget is fixed and any fluctuation in expenses will have wider consequence on their lifestyle. Banks also understand that raising EMI will only hurt them because of possibility of NPA.The recent hike was another blow to the borrowers. The RBI hinted that this could be the last hike.

 

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 Increase in tenure of home loan

Even though banks have increased the tenure to avoid increase in EMI, the liabilities have increased on borrowers because of 13 policy rates hikes in last 18 months.

Amid the high inflation and interest rate, there is news from State Bank of India (SBI) that has decided to increase the tenure of home loan repayment to 30 years. This step is expected to ease the burden of EMI on borrowers. This decision by SBI will influence other banks to follow the suit. There are some banks that will do this on case to case basis.

Impact on borrowers

Needless to say, the impact will be good in short term as this step will reduce the EMI significantly. However, borrowers have to think of the long term implication of increased loan tenure to 30 years as well as the increased interest outflow because of increased tenure.

For example, typically home loan borrowers are in their 30s when they decide to borrow and buy a home. If the loan tenure is increased to 30 years, borrowers will have to keep paying the loan even after retirement. This EMI burden will be difficult to fulfil in the old age when there is no source of income. Moreover, as borrowers grow in age, the expenses will only increase. The cost of higher education is going up and the cost of living is also going up steadily. Home owners will need money to finance education of their children and meet their regular expenses after few years. However, borrowers have to decide for themselves whether they will be comfortable taking a burden for next 20-30 years.

The second point is increased outflow of interest. Increase in tenure comes at a cost. Let’s look at the extra burden imposed by longer tenure.

CASES

Case 1

Case 2 (Same tenure, Increase EMI)

Case 3 (Increase tenure, same EMI)

Loan amount

3000000

3000000

3000000

Interest Rate

11.00%

12.00%

12.00%

Number of months

240

240

348

Monthly Instalment

(30,684)

(32,706)

(30,664)

Total Paid

(73,64,251)

(78,49,327)

(1,06,71,115)

Interest Paid

(43,64,251)

(48,49,327)

(76,71,115)

Extra Burden over the tenure of the loan

 

4,85,076

33,06,864

Prepayment now versus increase in tenure

Few days back national housing board has instructed lenders not to charge prepayment penalty from home loan borrowers. This is good news. Borrowers can do research on refinancing rates and decide accordingly. Even if the advantage is 1%, this can helpthemsave good amount of money in longer term.

Refinancing

Borrowers can prepay the loan by taking refinancing from other lenders. Since the prepayment penalty is no more applicable, borrowers can prepay without worrying about the complex prepayment structure and high charges.

Repayment using own money

They can also use their savings to prepay the loan. If borrowers do not have enough to repay fully, they can do it partially or increase their EMI in order to pay it earlier than the tenure.

Finally

Increase in tenure may look better in short term but it incurs a huge cost on your savings. You would be better off with increase in EMI than in tenure.

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