Increase EMI, Shorten tenure – Home Loan

Home loan tips

Contemplating on buying a home on loan? Here are some quick tips before you finalize.

It is certainly tempting to opt for a longer tenure on a home loan as it reduces the EMI amount. However, in a long-term loan, the interest outgo is too high. Let us see how.

Lenders easily offer home loans for 25 – 30 years. According to financial experts, taking a loan is negative compounding. The longer the tenure, the higher is the compound interest that the bank earns from you.

Considering a 10-year loan at 10 per cent, the interest paid is 59 per cent of the borrowed amount. This shoots up to 131 per cent if the tenure is 20 years. For illustration, if you take an Rs 50-lakh loan for 25 years at 10 per cent, you will end up paying Rs 86.3 lakh (or 172 per cent of the loan amount) in interest alone.

Take another case where a young person with lesser income will not be able to borrow adequately if the tenure is short, say 10 years. He will have to necessarily increase the tenure to ensure that the EMI fits his pocket. For such borrowers, the best option is to increase the EMI amount every year aligned with an increase in the income.

Increasing the EMI amount brings down the tenure radically. A bare minimum of 1 per cent hike in the EMI every year can trim off three years from a 20-year repayment term. Supposing that the borrower’s income rises 8 – 10 per cent every year, increasing the EMI in the same proportion should not be very difficult. A 5 per cent increase in the EMI every year will shrink the tenure by more than eight years. A further enhancement of 10 per cent every year would end the loan in just nine years and three months. A little more tightening of   the belt by a 20 per cent increase in EMI every year, will guarantee a debt free life in just seven years!