How EMI varies based on loan amount, tenure, and interest rate
Equated monthly instalment (EMI) is the monthly payment towards a home loan. EMIs are the fixed instalments that a borrower needs to pay over the tenure of the loan. The loan amount plus the interest for the loan divided by the tenure of the loan (in months) gives the EMI amount.
The amount of EMI is decided upfront, in advance, and usually remains so during the currency of the loan. The amount of EMI to be paid depends on the amount of loan, tenure of loan, rate of interest, mode of calculation of interest etc. Longer the tenure, lower is the EMI. Shorter the tenure, higher is the EMI. But, at the same time, it is to be noted that in case of longer tenure loans, during the initial years, the interest component is more and the principal component is less. Over the years, this gets reversed and the principal component becomes more while the interest element gets lesser. This is because, in the initial phase, the loan amount outstanding is more as compared to the later years.
The interest rate charged is higher for longer tenures because of the increased risk of the bank. However, the EMI is lower because the loan and interest are spread over a longer span of time. The interest rate, on the other hand, is lower when the tenure is shorter because of the lower risk the bank needs to take. In the case of shorter tenures, the EMI is higher because the loan and interest are to be repaid over a shorter span of time.
AGE AND INCOME
Depending on the present and future income and expenditure levels, you can choose an appropriate loan tenure.
The age of the borrower is important in this case. In case you decide to borrow at an early age, you can opt for the longer tenure loans, where the EMIs would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing closer to retirement, you have to opt for a shorter tenure.
The income level is also important. This means both the present as well as the future income as estimated. A borrower should be able to repay his EMIs without compromising on his quality of living. The cash available after payment of EMI should be adequate for a comfortable life.
TAX BENEFITS
While going in for a loan option, you should ensure you get the maximum tax benefits available under the Income Tax Act. Presently, interest up to Rs 1.5 lakhs per annum paid on housing loans is deductible from the taxable income. This translates into a saving of Rs 49,500 on the tax front. No other tax avenue offers a better opportunity than this where an asset creation is partly financed by tax sops. Accordingly, you should structure the housing loan amount and tenure, so that your annual interest component is Rs 1.5 lakhs.
IN CASE OF A BORROWER IN HIS LATE 20s OR EARLY 30s WANTING TO BORROW RS 10 LAKHS, HE WOULD HAVE TO PAY:
• For a 5-year loan his EMI would come to Rs 20,640 per month
• For a 10-year loan his EMI would come to Rs 12,810 per month
• For a 15-year loan his EMI would come to Rs 10,600 per month
• For a 20-year loan his EMI would come to Rs 9,490 per month
