RBI Issues Circular On Levying Unfair Interest Charges On Customers

When it comes to buying a home, making the right financial choices is crucial. One of the most significant decisions is how to structure your home loan. Should you opt for higher Equated Monthly Installments (EMIs) and pay off the loan quickly, or go for lower EMIs with a longer loan tenure? This article will explore the pros and cons of both options to help you decide.

Recent changes in home loan rules by the Reserve Bank of India (RBI) have given borrowers more control. Now, you can choose whether to pay higher EMIs or extend the loan tenure if interest rates rise. This decision used to be primarily in the hands of lenders. With these options at your disposal, the next question is: Which path is best for you? Let’s break down the advantages and disadvantages to make your decision easier.

Weighing the two options
Let’s say you opt for the higher EMI route — the obvious result is that you have to shell out more money from your monthly budget to repay that home loan. However, on the brighter side, you will also be reducing the principal amount and the interest rate paid over your loan duration, thereby, bringing down the overall loan repayment amount.

In such a case, you should have extra income sources, so that a higher EMI doesn’t burn a hole in your pocket and disturb your monthly budget. Say, if you had planned on watching two movies in one month, a higher EMI would make you cut down on your entertainment expenses, but an extra salary is not hurting anyone.

In the other scenario, that is if you keep your EMI the same and go for an elongated tenure of repayment, although your monthly budget is managed for the time being, you are in for a few more years of crunching your expenses. In this case, you must have a source of income till the time you repay your loan. For instance, if you are currently aged around 45 and the loan tenure is for 15 years, by the time of your superannuation at 60 years, your loan should have ideally been fully repaid. However, when you go for an elongated period of repayment, it will be eating into your retirement corpus.

While there’s no certain formula to arrive at the right option, it depends on case to case. One can take a call about it depending on their monthly income, repayment capacity, financial goals in the short and long term, risk tolerance, and monthly budget.

Factors to consider
While choosing either the higher EMI or longer tenure route, you should first consider which of the two options will give you more freedom to meet your financial goals, such as a car loan, children’s education, and marriages, saving for retirement, building an emergency fund, saving for a vacation, and paying off debt, among others.
Many of these financial goals are unavoidable for a happy and secure life. One must have sufficient money to meet these goals, and the changed loan repayment option shouldn’t be an obstacle in one’s way.

Risk tolerance is another major factor. If you have invested your money in mutual funds, the stock market, or say in schemes where there is a chance of losing your money, you should ask yourself how will you manage to repay the loan if you suffer losses in your investments.

Your monthly budget can be another factor in determining loan repayment options. There are expenses such as groceries, children’s education, investments, personal care, health care, and entertainment, among others, that you have to keep some money aside for every month. The right move will be to take a good look at your income, subtract the monthly budget from that, and decide whether or not you have enough to go for a higher EMI option. Remember, being financially stretched is not an option.

Floating and fixed rates
Before deciding on going for a higher EMI or longer loan tenure, you could also think of options such as switching from a floating-rate interest loan to a fixed-rate loan.

A fixed rate will give you immunity from revised interest rates as your EMI will remain the same.
Consolidating multiple loans may also help you get a larger loan at a lower interest rate. In refinancing, you can opt for a lender that offers you the same home loan at a lower interest rate. It will also reduce your EMI, and you may feel less psychological pressure to repay the home loan.

With the RBI rules in place, you have the option to choose a higher EMI or an elongated tenure. Before making a decision, assess different options like financial goals, risk tolerance, monthly income, switching to a fixed rate, refinancing, and consolidating, and make a smart choice.

The author is CEO, and Co-founder, of Basic Home loan. Views are personal.