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  • How does the Home Loan Repayment Period Affect the EMI you Pay?

    Every person dreams of owning a home and while many manage to achieve this without any help at all, a majority of us need to take a home loan. Simply put, a home loan is a financial aid that helps you achieve your lifelong dream of buying a house. However, while availing a home loan may be easy, it comes with its very own sets of responsibilities that are to be fulfilled diligently.

    Yes, we are talking about the EMI (Equated Monthly Installments) that you need to pay on a monthly basis to your lender, in order to repay your Home Loan. And while there are many factors which influence the EMI you pay, the most crucial factor is the loan repayment period.

    But before we proceed any further, let us understand what exactly an EMI is?

    As mentioned earlier, EMI is a sequence of monthly payments that you make to your loan company to pay back the loan. This amount does not vary dramatically over time, unless there is a sudden change in the rate of interest, or you pre-pay a part of your loan’s principal amount. Since no lender will give you a loan without charging any interest on it, EMI is a mix of principal amount and the interest applied to the same.

    In the initial years of the repayment period, a huge chunk of your EMI goes to interest. However, over time, this ratio reverses with principal being the major component of your EMI. This is because as principal amount reduces over the years, the interest applied reduces too.

    Loan Tenure vs. EMI

    As a rule of thumb, greater the home loan repayment period, lesser is the EMI you will pay and vice-versa, for a particular loan sum and rate of interest.

    For example, let us assume that you need a home loan of Rs. 40,00,000 at an interest rate of 11 percent. If you choose to repay your loan over a period of 30 years, then your monthly commitment will be Rs. 38,093. However, if you reduce your tenure to, say 15 years, your EMI will shoot up to Rs. 45,464. The following table illustrates how your EMI will vary with respect to your home loan tenure, for the mentioned rate of interest and principal amount.

    Loan Repayment Period EMI
    5 years Rs. 86,970
    10 years Rs. 55,100
    15 years Rs. 45, 464
    20 years Rs. 41, 288
    25 years Rs. 39,205
    30 years Rs. 38,093

    Now that you know how home loan EMI and home loan repayment period are related, let us take a look at how you can find a balance between the two.

    Considering that an EMI is a serious financial commitment, there are a couple of factors you need to take into account before you decide on your loan tenure.

    • Age – When it comes to availing a home loan, your age plays an important role. Since your lender expects you to pay the loan before you retire, your age will play a part in determining your tenure. If you are in your 20s or early 30s, then you will have better chances of getting a longer repayment period.
    • Your Income – Your monthly income, expenses, and obligations must be considered before choosing an EMI amount. Ideally, you should be able to pay your monthly installment easily, after factoring in the above expenses. Once you arrive at an amount you’re comfortable paying on a monthly basis, you can then decide on the tenure.
    • Pre-paying – Many lenders have the provision of pre-payment towards the home loan principal amount. Doing this brings down the principal sum and in turn, the interest to be paid. This correspondingly leads to a reduction in the EMI, which may be translated into a change in loan tenure.
    • Life Stage – It is wise to consider your life plans before you settle on an EMI amount. If you are going to start a family, then your monthly expenses will only increase. In such a case, it is advisable to go for a longer tenure and a lower EMI. However, if you are approaching the age of retirement, then your EMI and loan repayment period will be such that your loan is repaid in full by the time you retire. This would generally mean a shorter tenure and a larger EMI.

    The above factors will help you determine the kind of home loan tenure you should be looking at, while opting for a home loan. It is important to do thorough research on this front and arrive at an EMI amount that you are comfortable paying on a monthly basis. You can also use our Home Loan EMI Calculator to find out how much EMI you may have to pay, to own your dream house.

      

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