A home loan is one of the most significant financial commitments for anyone aiming to purchase their dream home. The tenure of your loan plays a crucial role in determining both your EMI (Equated Monthly Instalment) and the total interest costs over the life of the loan.
Many borrowers face the dilemma of whether to extend their tenure to reduce monthly payments or shorten it to become debt-free sooner. Adjusting your loan tenure can have long-term financial implications, making it essential to understand its impact for making an informed decision.
In this article, we’ll explore how changes in loan tenure affect your EMI and total interest costs, why to consider it, and strategies to optimise your repayment using tools like the home loan EMI calculator.
Why Change Your Home Loan Tenure?
Adjusting your home loan tenure can help you manage your finances more effectively. Here are some common reasons why borrowers choose to modify their tenures:
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Lower EMI Payments: Extending the tenure spreads your repayment over a longer period, reducing your monthly EMI and easing financial strain. However, this could increase the total interest paid over time.
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Reduce Interest Costs: A shorter tenure typically leads to higher EMIs but lowers the overall interest costs, saving you money in the long run.
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Match Your Financial Situation: If your income has increased, shortening the tenure can help you close the loan faster. Conversely, if you're facing financial constraints, extending the tenure can provide temporary relief by lowering monthly outgo.
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Achieve Financial Goals: Becoming debt-free sooner allows you to allocate funds toward other priorities, such as retirement planning, investments, or major life expenses.
Steps to Change Your Home Loan Tenure
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Contact Your Lender: Reach out to your financial institution to confirm if your loan agreement allows tenure modifications. Enquire about any applicable fees or charges for the adjustment.
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Assess Your Financial Situation: Before proceeding, evaluate your income, existing expenses, and long-term financial goals. Use a home loan calculator to compare different tenure options and understand their impact on your monthly payments and total interest outgo.
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Submit a Request: Once you decide on the preferred tenure, submit a formal request to your lender. You may need to provide updated financial documents, such as salary slips or bank statements, to support your application.
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Receive the Updated Loan Schedule: After approval, your lender will issue a revised repayment schedule reflecting the new tenure and adjusted EMI. Carefully review the details to ensure they align with your expectations and financial plans.
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Monitor Your Payments: Once the tenure is adjusted, track your loan account to confirm that the EMI changes are accurately reflected in your repayments. Promptly report any discrepancies to your lender.
Strategies to Optimise Loan Tenure (With Pros & Cons)
1. Increase Your EMI Payments
Increasing your monthly EMI slightly can significantly reduce your loan tenure. By paying more each month, you can reduce the outstanding principal faster, which lowers the total interest paid over the loan’s duration.
This method works well if you have a steady income and can afford higher EMIs without financial strain. However, the downside is that it increases your monthly financial outflow, which may put pressure on your budget.
2. Make Lump Sum Prepayments
Using bonuses, incentives, or accumulated savings to prepay a portion of your loan can directly lower the principal amount, reducing the overall interest costs.
A single large payment can shorten the loan tenure or reduce EMI, depending on your preference. While this can be a good way to save on interest, it requires surplus funds, which might affect liquidity and your ability to manage other financial commitments.
Additionally, some lenders impose prepayment penalties on fixed-rate home loans. Ensure you check your lender’s terms before opting for this strategy.
3. Consider a Home Loan Balance Transfer
Switching to a lender offering lower interest rates can help reduce EMI payments or allow you to shorten your loan tenure while maintaining affordable instalments. Alternatively, depending on lender policies, you may also get the option to choose a longer tenure if reducing the EMI burden is a priority.
However, a balance transfer may involve additional charges such as processing fees, documentation costs, and potential prepayment penalties from your existing lender. Weigh these costs against the potential savings before making a decision.
A Simple Example of How Loan Tenure Affects EMI
Imagine you take an INR 50 lakhs loan at a 10% per annum interest rate. Using the home loan EMI calculator provided by SMFG Grihashakti, one of India’s leading NBFCs, we get the following results:
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For a 20-year tenure, your EMI would be around INR 48,251, and the total interest amount would be approximately INR 65,80,260.
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For a 15-year tenure, your EMI increases to approximately INR 53,730, but the total interest amount reduces significantly to around INR 46,71,446.
Keep in mind that the EMI calculator does not account for any value-added services you may have opted for with your loan, such as insurance.
Conclusion
Changing your home loan tenure can be an effective way to manage your EMIs and optimise overall loan costs. Whether you choose to shorten the tenure to save on total interest paid or extend it to reduce the monthly repayment burden, understanding its long-term impact is crucial.
Use an EMI calculator for home loans to experiment with different tenures, loan amounts, and interest rates to make an informed decision.
*EMI calculators only tell you an estimated figure. Your actual EMI, interest rate, and other loan terms will depend on your eligibility and the lender’s policy at the time of the loan application.
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