A home loan helps you realize your dream of having your own home. A home loan comes with its own financial commitment, in the form of EMI (Equated Monthly Installments) that has to be serviced by you diligently over the tenure of the loan. It is important that you strike a fine balance between your monthly EMI commitments and Loan Tenure.
Now first, What is an EMI?
EMI is a series of monthly payments that you make to the lender towards fulfillment of your loan obligations. This amount stays fairly constant over the tenure of the loan unless there is a major change in the interest rates or you have pre-paid a part of the loan principal. EMI is a combination of principal repayment of the loan and the interest on the same. In the earlier years of a loan, 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.
Composition of EMI in the earlier years of loan
Composition of EMI in the later years of loan
Must Read: What is the Loan Repayment Schedule and How is it Calculated?
How does the loan repayment period impact EMI?
The loan repayment period and the size of your EMI are inversely related. That is, the longer you take to repay your loan, the lesser will be the monthly commitment in terms of EMI and vice-versa, for a given loan amount and interest rate.
For example, INR 50 Lacs of home loan to be paid over a tenure of 30 years would mean you have to pay a monthly EMI of INR 43,694 at a rate of interest of 9.95%. However, if you reduce the tenure to 20 years, meaning loan repayment is spread over a shorter time frame, you monthly EMI will increase to INR 48,086 :
| Loan tenure | EMI Rs.@ 9.95% rate of interest |
|---|---|
| 5 years | 1,06,112 |
| 10 years | 69,937 |
| 15 years | 53,577 |
| 20 years | 48,086 |
| 25 years | 45,259 |
| 30 years | 43,694 |
The question is how you strike a fine balance between repayment tenure and EMI burden
Factors to Consider While Striking a Balance Between EMI Burden and Interest Expense
- Your Age: Lender expects you to repay your loan before you retire. So if you are in your late 20s or early 30s, your age can play an advantageous role in opting for a longer tenure.
- Income and surplus: Choose a monthly EMI that you are comfortable paying after factoring in your current expenses and obligations. Based on this calculated home loan EMI you are comfortable paying, you may choose the tenure.
- Your life stage: If you are planning to start a family and you anticipate that your monthly expenses are only going to increase, it’s wise to settle for the longest tenure you can get and settle for a lower EMI. You can always prepay when you have surplus amount thereby reducing your loan repayment liability.Similarly, if you are nearing retirement, you would have to adjust the EMI and tenure so that your loan is repaid by the time you retire.
- Prepayment clause: Another important factor to consider is prepayment. If your lender allows prepayment any number of times without an additional cost, you can go in for a longer tenure & reduce the EMI burden in the early stages of your home loan tenure. Whenever, there is a surplus, you can make prepayment of loan.Since the pre-payment gets adjusted against the principal amount your principal amount gets reduced at a faster rate thus reducing your monthly EMI or loan tenure.
Must Read: How to Reduce Your Home Loan Interest Burden (4 Simple Tips)
Conclusion
We can conclude by saying that if you are in the life stage where you can go in for a higher loan tenure which results in a lower EMI, you should opt for the same. The prepayment clause proves to be a very handy option which allows you to prepay any number times without any additional charges. Not only does this give you the cushion of paying a lower EMI, but also allows you to reduce your liability as and when you have surplus.
FAQs
Does the EMI amount remain the same throughout the loan tenure?
The EMI amount usually stays the same during the loan tenure, unless there is a major change in the interest rate or you make a prepayment that reduces the principal. In the early years, most of the EMI goes towards interest, while later instalments contribute more towards the principal.
How does the interest rate type fixed vs floating impact my EMI?
A fixed interest rate keeps your EMI stable throughout the tenure, offering predictability. A floating rate may change during the loan tenure, which can increase or decrease the EMI based on market movements. Even with a floating rate, the EMI structure still shifts from interest heavy to principal heavy over time.
What happens to my EMI if I make a part prepayment on the loan?
When you make a part payment, it reduces the outstanding principal, which lowers future interest outflow. This can either reduce your EMI amount or shorten your loan tenure, depending on the option offered by your lender. Since prepayment directly impacts principal, it helps you close the loan faster.
Why do two loans with the same interest rate show different EMI amounts?
Two loans may show different EMI amounts even with the same interest rate because EMI depends on more than the rate alone. The loan tenure, the size of the loan, and how the repayment period is structured all influence the final EMI. A longer tenure will always result in a lower EMI.
Can I change my EMI amount during the loan tenure?
Yes, the EMI can be changed when you adjust your loan tenure, make a prepayment, or request a restructuring with your lender. If you lengthen the tenure, the EMI reduces. If you shorten it or make a part payment, the EMI may rise or the tenure may reduce, easing long term interest costs.
