The impact of interest rates on your home loan repayment tenureMay 17, 2023 . Home loans . 10 min read
Are your home loan interest rate and repayment tenure connected? Yes, they are. In this post, you will learn how your interest rate impacts your tenure, and even, vice-versa. Let’s first clearly understand a few terms.
You may have a fair idea of what the interest on your home loan is. When you take a home loan from a bank or n NBFC, they don’t just simply give you the amount and then expect it back as it is. They need to make the transaction financially viable and for that, they charge you an interest rate for the amount you are borrowing.
When you pay them back, you pay the principal amount (the money you have borrowed to purchase your home) plus interest. This interest maybe 8.5% per annum or 9% per annum, or whatever rate is acceptable to your bank.
Based on the amount you’ve borrowed and the quantum of interest you’ve agreed to pay, your tenure is computed. Tenure is, how many years it’s going to take for you to return the principal and the interest amount.
As many months as there are in those years, you pay those many EMIs. Suppose, your tenure is for 30 years. Since every year has 12 months, in 30 years, there will be 360 months, which means, there will be 360 EMIs to pay. The entire stretch of time through which you make monthly installments is called your tenure.
With the explanation of these essential terms out of the way, let’s now proceed toward understanding how your home loan interest rate impacts your repayment tenure.
How does your home loan interest rate affect your tenure?
When you research multiple banks, you find they all have distinct interest rates. Some offer a higher interest rate and some, a lower interest rate. Your interest rate decides eventually how much money you are going to have to pay. For example, if you have taken a loan of Rs. 20 lakhs and one bank asks for an interest rate of 8.5% and another bank asks for 9.5%, then obviously, you will pay the bank asking for 9.5%, more.
You have to stretch the amount of money you have to pay across your tenure. The longer the tenure the lower your EMI. The shorter your tenure, the more money you need to shell out every month.
Your home loan interest rate can affect your tenure whether you’re paying a fixed interest rate or a floating interest rate. If you’re paying a fixed interest rate, then your tenure will be decided at the beginning itself. This is a more predictable arrangement. You can plan your budget accordingly. Usually, banks offer a fixed interest rate for a pre-defined period, post which the floating interest rate kicks in.
Suppose the total of the principal and the interest amount comes out to be ₹ 60 lakhs which are divided over 360 months – ₹ 16,667 per month, approximately.
What if, due to a higher interest rate being charged by your bank, the final amount comes to be ₹ 65 lakhs? If you want the same tenure, every month you will need to pay ₹ 18,056 per month, approximately. But what if you want to pay ₹ 16,667 per month? You will have to agree on a longer tenure.
In the case of a floating interest rate, how much EMI you pay may change after in the set period in your home loan tenure. If the EMI is higher, you can either continue with the same tenure but pay a higher EMI every month, or pay the same EMI, but for a higher number of months.
What if you don’t want to pay a higher EMI every month but at the same time don’t want to expand your tenure? Is there another way?
This especially comes in handy when you’re paying a floating interest rate. Suddenly if your interest rate increases you may have to pay back more money to the bank. Conventional options are that you either raise your EMI or expand your tenure.
The third option is, to pay a lump sum amount as prepayment. As in the above example, the initial amount was ₹ 60 lakhs, but the new amount was ₹ 65 lakhs. If you have some spare cash, you can make a prepayment after talking to the bank representative assigned to your case so that neither your EMI rises, nor your tenure expands.
Your home loan interest rate may directly affect your repayment tenure as the amount that you need to pay to your bank increases or decreases accordingly. You have some options to keep your tenure the same: increase your EMI or repay a portion of your outstanding amount.
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