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Investment Planning: Home loan EMI and tenure

Home loan borrowers have experienced a roller coaster ride of highs and lows over the past few years. The interest rates hovered around six to seven percent about four years ago. Until a few weeks ago, they had touched 13-14 percent. Today, some banks offer a modest eight percent home loan interest rate. The fluctuations in interest rates have an impact on a borrower's EMI dues and loan tenure.

Scenario 1: When rates go up

Increase in the interest rates translates into greater burden on the borrower. The borrower has to pay more from his pocket towards his home loan. When rates go up, the borrower has the option to either increase his EMI or tenure. Increase in EMI keeping tenure constant means greater cash outflow every month towards your loan. Increase in tenure keeping EMI constant amounts to increasing the number of years you'll be repaying the loan.

Scenario 2: When rates go down

A reduction in rates is good news that borrowers yearn to hear. When interest rates go down, the monthly EMI amount comes down automatically. Otherwise, the borrower can keep the EMI constant and bring down his loan tenure. This way he will be free of debt sooner.

Scenario 3: When you switch

When a borrower switches from fixed to floating, or vice versa, the EMI and loan tenure depends on the principal outstanding. The new rate of interest applicable after you pay the conversion fee also determines the quantum of loan. The borrower could fix at a higher rate or float at the prevailing market rate. It is up to the borrower to adjust the EMI or tenure of the loan to his convenience.
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