Is lowering EMIs or shortening tenure the way in case of rate cut

When you get your EMI reduced 

Your monthly disposable income can increase right away if you lower your house loan EMI. Consider the following example: You have Rs.50 lakh debt that is still due with a 20-year term and an annual interest rate of 8.85%. Your EMI would drop from Rs.44,505 to Rs.42,918 if the interest rate on your home loan was lowered by 0.50%. You would thus have an extra Rs.1,587 accessible each month as a result.  

Additionally, by lowering your house loan EMI, you may be able to save money on interest payments, with a reduction of Rs.3,80,983 in your total interest costs over the course of the loan's 20-year term. This is illustrated visually in the table below: 

	Old	New
EMI	Rs.44,505	Rs.42,918
Repayment Tenure	20 years	20 years
Rate of Interest	8.85%	8.35%
Savings on Interest	Rs.3,80,983

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When you get your Tenure reduced 

The assumption that you maintain the same EMI amount while shortening the loan's term allows you to pay it off sooner. In the aforementioned example, if you continue to make the same EMI payment of Rs. 44,505 after the interest rate was reduced by 0.50%, you can pay off your loan in 18 years, which is two years sooner than the initial term. By using this strategy, interest savings equaling Rs 10,01,648 would be realised. 

This is illustrated visually in the table below: 

	Old	New
EMI	Rs.44,505	Rs.42,918
Repayment Tenure	20 years	20 years
Rate of Interest	8.85%	8.35%
Savings on Interest	Rs.10,01,648

Which of the two options should you opt for? 

In essence, both options can result in savings, however choosing to shorten the loan's term while keeping the same EMI yields noticeably more savings. You must, however, take your financial condition into account. If your monthly EMI represents a significant financial burden and takes up between 50% and 60% of your take-home pay, you might wish to choose a lower EMI. 

An inverse relationship exists between the loan tenure and EMI, which means that the longer the payback time, the lower the EMI, and vice versa. While the shorter tenure could reduce your monthly disposable income, it significantly lowers the overall interest paid. 

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FAQs on Rate Cut - Should You Decrease Your EMI or Shorten the Loan Tenure?

• What drawbacks do lengthier loans have?

  The length of your loan is one aspect that many personal loan providers use to determine the interest rate you're charged to borrow money. The longer term poses a greater risk to the lender because there is a greater likelihood that interest rates will see a significant adjustment during that time. 

• Does raising the EMI lower interest?

  How therefore can one make sure that their interest and EMI payments on their house loan are still manageable? Making greater EMI payments will help one repay the house loan more quickly and also save on interest payments because interest is computed based on the outstanding principal amount. 

• Is it wise to shorten the term of home loans?

  Shorter loan terms result in greater EMI payments but cheaper interest costs. The shorter term lowers the cost of borrowing, which lowers the overall cost of the property. 

• Is a longer tenure or a higher EMI preferable?

  In the last ten months, the EMI burden has significantly increased, and any further rise in interest rates will make it more challenging for new borrowers to qualify for home loans. You end up paying more interest if you keep the EMI constant while lengthening the loan term. 

• Will the interest rate on a mortgage decrease in 2024?

  In brief. Since the Reserve Bank of India (RBI) is anticipated to keep the repo rate at 6.50 percent, you might not see a decrease in the equivalent monthly interest (EMI) you pay on house loans until the second quarter of 2024. 

• What is a short loan's one drawback?

  The fact that short-term loans often have higher interest rates than other loan types is one drawback. This is because lenders view them as posing a greater risk. If you don't take precautions, the interest payments on your loan may consume a significant portion of the budget for your startup. 

• Why do banks favour long-term loans?

  The interest rate is typically lower than for other types of loans because of the larger loan amount and longer duration involved. The market's intense competition also guarantees that the bank will provide cheaper interest rates.