Should you increase EMI or tenure in home loans?

By BankBazaar | November 2, 2012

There have been times, when there were many fluctuations in the home loan interest rates leading to additional EMI burden on the borrowers. In most cases the banks have extended the tenures in order to accommodate the borrowers the same EMI so as not add on to their monthly financial commitments. In many cases where the tenures were not extended and the EMIs hiked the result were defaults by the borrower leading to further complications.

Implications of Increasing the Tenure for Borrower

 

Under certain circumstances the borrower may have to opt for increasing the tenure instead of increasing the EMI to meet to new enhanced rate of interest. Such a move has multiple financial implications for him:

  • May provide some relief if the borrower is unable to cope up with any further increase in monthly installments due to restriction of earnings and other essential expenses.
  • The loan will have to be repaid for a longer period which means that the interest will have to be borne for longer duration and the total interest paid at the end of the tenure will be high.
  • Additionally the total interest paid will increase in compounded manner as a new higher interest rate will be applicable for longer term which will multiply the total interest many fold.
  • The house will remain under loan mortgage for longer period making it difficult to raise fresh lower interest loans or even selling it off.

Implications of a Higher EMI

Increasing the monthly installment instead of longer repayment tenure will have the following implications for the borrower.

  • There will added burden of an increased monthly commitment which may be difficult for the borrower to sustain for long periods.
  • The borrower may ultimately start defaulting on the monthly installment turning the loan into a Non Performing asset for the bank which shall complicate the issue further.
  • If the borrower is able to cope up with the extra payment the loan shall be cleared in time and the high rate of interest shall be applicable only for s shorter duration.
  • The property shall become free earlier to provide new loans or for disposing off as the requirement may be.

Comparison Table

 

Let us analyze a case where a loan of Rs. 3000000 was availed on an interest rate of 11% initially for a period of 20 years wherein there was a hike in the interest rate to 12% in the first year of repayment.

Situation Normal Tenure Increase in EMI same tenure Increase in tenure same EMI
Loan amount 3000000 3000000 3000000
Interest rate 11% 12% 12%
No. of Months 240 240 348
Monthly Installment 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 of  Interest 4,85,076 33,06,864

 

As is evident from this example the increased tenure option implies that the total interest paid due to the hike in rates will be many times more as compared to the same loan where the EMI was increased keeping the repayment tenure same. This shall provide an clear idea to the customer that is always better to take on higher EMIs with some difficulties for a shorter period rather than opt for a lower EMI over a longer period.

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