Should I Increase my EMI?

emi-300x195The desire to own a dream home is a possibility these days with a home loan. But once an individual is in debt he tries to save more and want to be quickly debt free. So what’s the best choice – increase your EMI or the tenure? Let’s quickly explore –

Can I increase EMI?

Yes, you could increase your EMI in the middle of the repayment period. You may have to visit your branch for this.

Pros and cons of home loan prepayment

Repayment is a process wherein loan taker may wish to pay an ‘x’ amount of the total loan amount during the repayment period. Let’s take a sneak peek into the pros and cons of the process from the loan takers perspective:

Pros

  • The most obvious benefit out on prepayment is that your interest payout reduces. Prepayment of home loan results in an immediate reduction of the outstanding principal on the home loan that results in less interest being accrued on the loan account
  • Since your interest liability is low, you can complete the loan liability within a shorter period.
  • On prepayment, banks could give you two options – either to reduce your EMI or to decrease your loan tenure. If you have opted for reducing loan tenure, it would be beneficial as you could save a lot on your interest in the long run.

Cons

  • With prepayment, banks could give you two options – either to reduce your EMI or to decrease your loan tenure. If you have opted for reducing your EMI, in the short run it could serve beneficial as you could have a surplus of your monthly income but, in the long run, you would end up paying more to the bank as an interest.

Example 1 An individual has taken a 10,00,000 /- loan for 20years at 10% interest. EMI = Rs 9650/- per month! Prepayment amount = 100000 Total Amount paid with repayment = 23,16,052 /- Interest Paid = 13,16,052 /-

Example 2

On keeping EMI same and prepaying a lump sum amount of 2, 00,000 /- every 3 years

EMI = 9650 /- Total Amount Paid = 1646946 /- Total Interest Paid  = 746201 /- Total Interest Saved = 13,16,052 – 7,46,201= Rs 5,69,851 Total Time Saved = 6 years 7 months instead of the original tenure of 20 years

Example 3

On increasing EMI

Let’s say after three years you decided to increase your EMI by 1100 /- Loan Outstanding after 3 years = 950000[approx] /- New EMI = 9650 + 1100 = 10,750 /- New Tenure = 13 years 5 months Interest to Be Paid = 7,77,310 /- Total Amount Payable = 17,27,310 /- Interest Saved = 13,16,502  – 7,77,310 = Rs 5,39,192/-. The above examples clearly show how interest repayment in lump sum or by increasing EMI would help prepay the loan faster and make you debt free.

Four circumstances that impact your EMI

Due to change in rate of interest during the loan tenure

Under Floating rate of interest, your EMI may vary as and when RBI announces the rate cuts or increases. Your bank may or may not pass that rate on to the existing customers, but a change of interest could impact your EMI. However, if its fixed rate of interest then the change in bank rate may not affect you

Making Prepayments at regular or irregular intervals.

Most of loan providers allow the facility of prepaying your loan by making few of lump sum payments at regular intervals or as and when your savings allow for it. The best part of this is that your outstanding principal could reduce and thereby allowing you to save on interest component.

Altering your loan tenure

If you could negotiate a new loan term with your current loan provider or planning to switch over to a new loan provider with a new loan term, then your EMI amount would change accordingly.

Loan with unequal EMI’s

Some of the financial institutions are also offering their customers an option of “unequal  EMI’s” giving you the flexible repayment options.There are two types of loans inflexible repayment options –

  • Step-up loans- the EMI is low initially and increases as years roll by (balloon repayment). The step-up option is convenient for borrowers who are at the beginning of their careers.
  • Step-down loans – EMI is high initially and decreases as years roll by. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money

Understanding home loan prepayment

To understand home loan prepayment, you need to know that loan has two parts – principal and interest and unless we pay-off our principal our interest would never be reduced. Individuals should aim to wrap-up paying principal in the quickest time. Loan prepayment allows individuals to pay principal and thereby interest faster. For  example, an individual took a loan of Rs 100,000 for five years @ 15% per annum interest. Monthly EMI ~ Rs 2,382. Total interest to be paid in 5 years ~ Rs 42,920. Total amount to be paid back to bank ~ Rs 142,920 in 5 years. Now, suppose you decided to clear loan after 6th month itself. Total interest paid in 6 months ~ Rs 4,436. The above process of clearing loan in only six months instead of 5 years is called loan prepayment   We hope we have helped you in getting a clear picture of whether you should increase your EMI or not. If you still have any unanswered questions or need help, feel free to contact us here We would be glad to help you with your planning and investment related decisions.  

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Samiksha Seth Content Strategist – Dilzer Consultants Pvt Ltd.

Sources:

http://insight.banyanfa.com/home-loan-prepayment/#

http://www.emiexpert.com/loan/smart-way-to-manage-your-home-loan-emi-in-india/

http://emicalculator.net/circumstances-that-can-impact-your-emi

http://www.getmoneyrich.com/home-loan-prepayment-guide-india/

http://www.nitinbhatia.in/home-loan/home-loan-prepayment/