A home loan is an easy way to fulfill your dream of owning your own house. And although a home loan comes with a set of financial commitments, a proper balance won’t let it feel like a burden. This financial commitment comes in the form of an EMI (Equated Monthly Installment) that you need to pay diligently over the tenure of the loan. However it is important for you to strike a balance between your EMIs and tenure.
What exactly is an EMI?
When your home loan is approved, your bank adds up the total loan amount and the interest based on the rate of interest. This total amount is evenly distributed over the duration of the tenure, which you need to pay every month. The composition of the principal amount and interest amount in each installment varies as your tenure continues. In the early years of the tenure, interest forms the major component of the EMI. However, this proportion gradually reverses over time as the principal amount goes on diminishing with every EMI payment.
How are the loan repayment period and EMI related?
The loan repayment period and the EMI are inversely related. The longer you take to repay the loan, the lesser your EMI amount will be, and vice-versa. Let us take an example. If you take a loan of Rs. 50,00,000 at an interest rate of 9%, to be paid over a tenure of 5 years, you will be paying INR 1,13,133 per month. If the tenure is extended to 30 years, the EMI reduces to INR 43,851 per month.
Loan Tenure
EMI @9% p.a.
5 years
1,13,133
10 years
69,038
15 years
55,277
20 years
49,035
30 years
43,851
The question is how to strike a balance between the repayment tenure and the EMI amount.Consider these factors to balance your EMI burden and repayment tenure:
Your age: If you are in your late 20s to early 30s, your age can be advantage while applying for longer loan tenure. This is because the lender expects you to repay your loan before you retire.
Income & Expenditure: After factoring in your monthly income and expenses, choose an EMI that you are comfortable paying. Generally it is recommended that this amount be a little under half your monthly allowance.
Life Stage: If you are planning to start a family soon it means your expenses are likely to increase. In this case it would be wise for you to choose the longest loan tenure you can get, and then readjust later. Similarly, if you are near retirement, you should adjust your loan tenure and EMI so that you can pay off the loan before you retire.
Conclusion: One of the other important things to consider is your bank’s prepayment clause. If your lender allows prepayment any number of times without an additional fee, you can go in for a longer tenure. Whenever you have surplus you can make a prepayment, which gets adjusted against your principal amount. Consequently your principal amount reduces at a faster rate thus reducing your monthly EMIs in future.
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