Home Loan: To pay higher EMI or extend the tenure of home loan, which is a better way?

Buying a home is the ultimate dream for many individuals. Rising property prices across the country in recent years have kept that dream out of reach for many. Opting for getting a home loan could be a viable option to buy a new house. Taking a home loan comes with its own set of challenges.

One has to pay huge equated monthly instalments (EMIs) for a long period, which may have a major impact on their earnings in the long run. Besides that, the interest rates on home loans are also higher compared to other loans.

A revision in the repo rate, or the rate at which the Reserve Bank of India lends money to banks, directly impacts your EMIs. Banks change interest rates at periodic intervals based on the change in repo rate. Though the RBI kept the repo rate unchanged at 6.5 per cent in its latest monetary policy review, the repo rate had gone up by 250 basis points (bps) between May 2022 and April 2023. This means that home loans have risen significantly in the past few years.

For borrowers, there are two options to repay loans quickly. One is that they increase their EMI payments. Some also choose to extend their loan tenure to be able to pay lower EMIs as per their affordability. Confused about which option could be better for you? Read on to find out more.

Higher EMIs vs Longer Tenure: Which is better?

When a borrower has to choose between increasing EMI amounts and extending the loan tenure for easy repayment, a few factors need to be considered. In case of rising interest rates, lenders may renegotiate the loan to one with a longer tenure. However, this often extends the loan repayment period far beyond the general tenure of 15 to 20 years.  

If borrowers opt for an increase in the loan instalment amount and keep the tenure unchanged, they will be able to repay the entire amount within the same time. The interest charged on the loan in this case may go up substantially. 

Tips on loan repayment

Check the interest rate of the loan regime: In most cases, home loans are taken on a floating rate basis which forces the borrowers to pay the EMI as per any upward revision in the interest rate in future. While all loans after October 2019 have been shifted to the external benchmark rate, the older ones continue to remain under the previous system, with EMIs rising multiple times. It is important to check the regime and request for a change if the loan is older.

Change to lower rate: Some lenders charge lower interest rates from home loan borrowers. In such a case, you can ask your bank to get your loan transferred in exchange for a nominal fee. Keep in mind that such transfers may prove more beneficial in the early years of the loan term.

Prepayment: One of the most recommended solutions to ease the burden of home loans is trying to make a partial prepayment of the amount. This will help in bringing down the EMIs.