HOME LOAN - IN YOUR INTEREST

Dec 05 2015 : The Times of India (Pune)





The interest rate and tenure are two factors that have a bearing on the EMI you pay towards your home loan

Home loan repayments are made by way of equated monthly in stallments (EMIs). EMIs are arrived at by clubbing the principal and interest payable, divided by the number of months of the loan tenure.The EMI stays constant, divided equally across the loan tenure. Usually, the changes in rate increase or decrease are reflected in the form of a reduced or increased tenure as the case maybe, rather than any change in the actual EMI paid every month.
When you are paying an EMI, you are paying an interest component and a principal component in it. It is to be noted that in the initial years a major part of the EMI comprises the interest portion and only a small part goes to wards the principal repayment.In the later years of t the loan tenure, the composit tion changes the principal portion is more than the interest portion.
The EMIs depend on the loan amount, the tenure and the interest rate. For a particular loan amount and interest rate, the longer the tenure, lower will be the EMI and shorter the tenure, higher will be the EMI. Generally , the EMIs are expected to remain constant over the tenure of the loan.However, the EMIs do change sometimes in case some basic factors change. Usually , the loan amount remains constant, and what keeps changing over the life cycle of the loan is the interest rate. So, as and when the interest rates changes, the EMIs may also undergo a change.
The longer the tenure, higher will be the interest rate because of the increased risk the bank is exposed to. Here, the total interest amount in absolute terms is higher because of the longer tenure. However, the EMIs are lower because the loan and interest are spread over a longer period of time.
For example, if you borrow Rs 50 lakhs at 10 percent interest for 20 years, the EMI will come to Rs 48,250. If the interest rate is reduced to nine per cent per annum, there will be a change in the EMI. The new EMI will be Rs 45,000, for the same principal and tenure.In case the interest rate increases to 12 percent, the new EMI will be Rs 55,000.
You can lower the EMIs when either the interest rate decreases or if you reduce the principal amount. Alternatively, even when the interest rate has come down, you can continue with the existing EMI. This helps you pay off the loan earlier and also reduce the overall interest burden.
By virtue of a reduction in the interest rate, the tenure of the loan can be reduced. Alternatively, by continuing to pay the same EMI, you can avail the option of drawing an additional amount, keeping the loan tenure unchanged.
In case the interest rate increases, although the EMIs will still remain the same, the tenure of the loan will be extended. Similarly , an increase in the interest rate will mean an additional cost for a borrower on a floating rate scheme. The bank may change the EMI to reflect the increased cost.