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Home Loan Rate Hikes: Should You Increase Emi or Tenure of the Home Loan?

Home loan

Choosing a suitable home loan tenure can be confusing when opting for an extensive loan amount. For instance, if you consider a loan amount as high as Rs. 40 lakhs, your decision to increase or decrease the Rs. 40 lakh home loan EMI repayment tenure will significantly affect the EMI amount. Hence, before deciding on one, you must carefully evaluate the benefits and problems associated with each to ensure that you make the right choice.

Benefits of Longer Home Loan Repayment Tenure

The benefits of longer home loan tenure are as follows:

  • Flexible loan repayment options

A longer tenure would give you ample time to repay your loans. Thus, there are fewer chances of default or delay. Also, there are no negative impacts on your CIBIL score. Although, doing so will increase the total interest outgo against the loan.

  • Availability of tax exemptions

Sections of the Income Tax Act including Section 80C, allow tax benefits on housing loans. The 80C benefits apply only to the principal amount of a loan, and you can get an exemption of up to Rs. 1.5 Lakhs every financial year.  

  • Lower monthly instalments

Lower EMIs often accompany higher loan repayment tenure. You can use this money either for savings or for the purpose of investment. Thus, you can increase your earnings by opting for a longer term. 

  • Higher loan value

You can get approval for a higher loan amount if you opt for a longer tenure. This is mainly because financial institutions consider it easier for you to repay a higher loan amount if the term is longer. 

Problems Associated With Longer Tenure

The problems associated with longer tenure are as follows:

  • The interest keeps compounding with the tenure; as a result, you will have to pay higher interest on the loan amount.
  • Until you ultimately pay off the loan, it might be difficult for you to opt for any other loans if needed. 

Benefits of Higher Home Loan EMI

You can easily use a home loan EMI calculator to determine the monthly instalments before you apply for a loan. The benefits of a higher home loan EMI are as follows:

  • Quicker loan repayment

If you opt for a higher EMI, you can pay off the loan within a shorter duration. Thus, you will be able to free yourself from the burden of EMI payment at the earliest.

  • Increase in credit score

If you repay your loan within a shorter duration, you can project yourself as a worthy candidate who can manage finances well. This will increase your CIBIL score and make it easier to get approval for higher amounts in the future. 

  • Availability of tax benefits

If you opt for a longer tenure, you can enjoy tax benefits under Section 80C, Section 80EEA, and Section 24 of the Income Tax Act. However, to stand eligible for these benefits, you must fulfil the conditions associated.

  • Saving more on the interest

If you opt for a higher EMI and shorter loan tenure, you can save more on your interest as the loan will be paid off early. 

Problems Associated with Higher EMI

Problems associated with longer tenure are:

  • You might have to cut down on your current lifestyle for a few months to stabilize the disrupted budget.
  • Your overall financial planning may get affected.

Factors Affecting Home Loan EMI 

The different factors that affect a home loan EMI are:

  • Loan tenure

Loan tenure is inversely proportional to EMI. Therefore, if you choose to opt for a longer term, you will have to pay a lesser EMI. 

  • Interest rate

The interest rates charged by financial institutions directly affect the loan amount. This means that if you opt for a lower interest rate, the EMI would be less and vice versa. 

How to Reduce Home Loan EMI 

Ways to reduce home loan EMI are as follows:

  • Opting for a longer tenure

You must opt for a longer tenure if you want to reduce your monthly instalments. Lenders charge lower monthly instalments since they know you will have substantial time to pay off the loan.

  • Opting for balance transfer facilities

If you come across a financial institution offering a lower interest rate, you must opt for a balance transfer. This would considerably lower the EMI and lets you save more.

  • Trying to prepay your loans

Prepaying your loans before the completion of repayment tenure considerably reduces the monthly instalments. Also, no additional charges are usually associated with loan prepayment.

Now you must clearly understand the benefits and problems associated with a longer loan tenure and higher EMI. Returning to the former example of choosing the suitable tenure for a Rs. 40 lakh home loan EMI, you must select the one that suits you best after considering all the mentioned aspects.

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