TomorrowMakers

Repaying a loan is a long-term commitment, and even small changes in internal or external factors can have a snowball effect.

How to choose the right EMI amount and tenure for your loan?

Buying a home is a cherished dream for millions of Indians. With the easy availability of mortgage finance, attractive interest rates and flexible terms, it has become easier than ever before to fulfil this dream. 

Repayment through equated monthly instalments or EMIs over the tenure of the loan makes the prospect affordable for many women. However, repaying the loan is a long-term commitment, considering tenures usually range between 20 to 30 years. An adverse change in your financial capabilities, interest rates or even other unexpected liabilities can significantly impact your repayment plan as well as your other financial goals. 

Related: Why Make Women The Primary Or Co-Applicant When Availing Of Housing Loans?

Finding the balance between a comfortable EMI and tenure

The repayment tenure and EMI have an inverse relation. A lower EMI will result in a longer tenure, whereas if you are looking for a shorter tenure, you will have to pay bigger monthly instalments. By opting for an unnecessarily longer tenure to reduce your EMI burden, you would also end up incurring more interest over the repayment period. To make this assessment, calculate loan amount based on EMI and see the total liability change as your tenure increases or decreases.

To find the right balance between an optimal tenure and EMI, here are some factors to consider.

Take stock of your income and expenses

Most banks and NBFCs will structure an EMI plan equivalent to 40% of your take-home salary or income. However, every family’s budget is different, and over-committing to the EMI can put a strain on your other needs. 

By analysing monthly income and expense statements over the last 6 to 12 months, you will have a better idea of your net income and the surplus you can allocate towards the EMI. Again, the entire surplus should not be promised to the EMI. Leave a buffer to account for other unanticipated expenses and keep a healthy credit score.

However, if you have a multiple-income household where one partner takes care of living expenses, you can commit to a bigger EMI, which will, in turn, allow you to shorten your loan tenure.

Related: Home Loan: Why It Makes Sense To Increase The EMI Or Make Partial Prepayments

Assess your financial prospects

Salaried professionals see their disposable income rising over a period of time. This opens up the possibility to accommodate a higher EMI every couple of years. In doing so, you will be able to pay off your loan earlier and reduce the overall interest costs. 

If you are in a secure job with structured growth prospects, opt for a step-up EMI plan from the beginning of the tenure, where the EMI scales up once every three to five years. This saves you the hassle of asking for step-up approvals every time you wish to pay more.

Account for existing and future liabilities

Your home loan is not the only financial commitment to consider. Other existing loans, such as car loans or personal loans, rent, etc., are other key factors that will impact your EMI obligation as a family woman. 

Conversely, if you are planning on sending children abroad for further studies or looking to retire within a 15-year horizon, opting for a longer tenure may not work well with these plans. You would be better off repaying the mortgage earlier so you can take another loan for studies (if required) or start saving up seriously for your post-retirement needs.

Related: How To Calculate Your Loan EMI Easily

Try out different possibilities with an EMI calculator

All banks, NBFCs and even digital aggregators offer a free online calculator that allows you to evaluate various EMI and tenure possibilities along with the option to modify the loan amount and interest rates. 

The calculator also gives a detailed break-up of the capital and interest cost for different loan amounts, interest rates and tenure. This is a critical tool that not only helps decide between different low cost EMI loans but also aids in structuring the right repayment plan that helps you own your dream home in a comfortable and stress-free manner.