Finding the right balance between EMI & Home Loan Tenure Period - Kotak Bank

30 AUGUST, 2019

The easy access to home loans has made home buying process easier than the past. Nowadays, any individual having a good credit score and stable income can get quick approval on his/her home loan application. Before getting a home loan, you need to know certain things related to it, such as home loan eligibility, interest rates, etc.  Among those factors, EMI and tenure of home loan have a long-term bearing on your financial planning. Therefore, finding out the right balance between the EMI amount and tenure of home loans is very important.

Let’s start with Equated Monthly Instalments- EMI
After borrowing a home loan, you need to make the monthly payments to the lender to repay the loan. The monthly payments made to fulfil the loan obligations are called as EMIs. The EMIs are inclusive of the interest amount as well as the principal of the home loan amount. The amount of EMI mostly remains the same over the tenure of home loan, but it may change in the following cases,

  • If the floating interest rates change,
  • If you make pre-payment on the principal loan amount

During the early days of the loan, EMI consists of a higher interest component of the loan. Over time, the principal amount increases as the interest diminishes.

The relation between tenure and EMI

The tenure of the home loan is the repayment period selected by the borrower. The EMIs of your home loan is inversely proportional with the tenure. In other words, the longer the time you chose to repay the loan, the lesser will be the amount of EMI and vice versa.

Let’s understand how tenure and EMIs work, assume that Hari has borrowed Rs. 60 lakhs as a home loan at an interest rate of 9%. So, the EMI will be,


Tenure

Loan EMIs

Total Interest Payable

10 years

Rs. 76,005

Rs. 31,20,656

20 years

Rs. 53,984

Rs. 69,56,054

30 years

Rs. 48,277

Rs. 1,13,79,849

 
In the above table, you can clearly see that, as the tenure increases, the EMI decreases. However, the amount of total payable interest increases.
In order to maintain a fine balance between tenure and EMI you need to consider the following factors,

The disposable income

You should select the EMI amount by considering your disposable income. For this, you need to study your current financial liabilities, spending habits and expenses. Once you find the amount you are comfortable to pay as EMIs, you can choose the suitable tenure.

Employment type

Your employment status is one of the crucial factors in deciding home loan eligibility. Thus, financial organisations offer longer tenure and easy EMIs to the people having significant experience in their respective fields.

Your age

Financial institutions tend to offer longer tenure to the people in their 20s or 30s than people in their 40s and 50s. This is because the loan lenders expect you to repay your loan before you retire. So, if your age and retirement have a long gap, you can go with the longer tenure.

Long term plans

Generally, people in their 30s have long-term plans like starting a family or relocating to some other city. Your overall expenses will most likely increase if you have such long-term plans, which can negatively affect your ability to pay EMIs. Therefore, it is a wise decision to select a longer tenure with lower EMIs if you have any long-term plans. Besides, you can always prepay the home loan with the surplus amount to reduce the overall loan liability.

Pre-payment option

Pre-payment is the option by which you can pay the additional cost over and above EMIs. Pre-paying reduces the burden of home loan EMI by keeping the tenure constant. The pre-payment made against the home loan will help to settle the principal amount at a faster rate and thus, reduce the future payable interest on it. Just make sure that the banks or financial institutions do not charge pre-payment fees

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.