At MintGenie, we go a step further in making sure all your personal finance related questions are answered. You have a question, we get it answered. In this series, we take up a question related to your money and ask four financial advisors to give their views. You get four detailed views to help you make an informed choice.
Q: RBI has increased interest rates and more hikes are expected. My bank will be sending me a letter informing me of rise in me EMI on my home loan. What's better? Increase my monthly EMI amount or should I keep my EMI constant and increase the tenure of the loan?
Monish Anand, Founder & CEO, MyShubhLife, says:
Yes, the interest rate hike will adversely impact the borrowers who are on a floating interest rate.
“Home loan borrowers will be most adversely affected as most of home loans are on floating rate basis where any such hike is passed on to the borrower. All floating rate home loans taken after October 1, 2019 are linked to an external benchmark as per RBI’s mandate. As most of the banks have selected the repo rate as their external benchmark, a hike in repo rate will most likely mean an increase in loan interest rates.”
He added, “Typically banks will increase your tenure and let your EMI stay the same, howsoever this is uneconomic for the borrowers. If they can afford it's better to let the tenure stay the same and pay the higher EMI. The longer you keep your loan tenure, higher will be the amount of interest you end up paying.”
Only if the new EMI is unaffordable then the tenure should be increased.
Amit Kumar Tanwar, Founder & CEO of Loan4MSME, says:
"Customers having cash flow issues, should go for increase of loan tenure, otherwise it's always advisable to increase your EMI as the floating rate go up. This helps in timely repayment and closure of loan thus avoiding more interest payments to financial institutions."
Renu Maheshwari, CEO and principal advisor, Finscholarz Wealth Managers, says:
The amount of housing loan EMI should be decided based on payment capacity of borrower and tax benefits offered under section 24 of I-T Act. "If a person can afford higher EMIs, they can opt for it. Prolonging the loan repayment may hurt other financial goals. If the purpose of loan is tax planning then the prolonging the tenure is a better idea," she says.
Deepali Sen, Founder Partner, Srujan Financial Services, says:
“Wherever possible, opt for a higher EMI because of the higher interest rate with the tenure remaining the same. If possible, pay the EMI that would be more than the increased EMI value so that the overall tenure is reduced. With the same tenure, the interest component will as it is going up."
The idea is to pay a higher amount to keep the tenure intact instead of opting for a longer loan term, and if possible, increase the EMI much beyond the increased interest rate so that you are able to wind up the loan in lesser time. In the short run, it may be more painful with more money going out as EMIs, but in the long run, you will get rid of your loan quickly, she says.
Have a burning question regarding your money you want an answer to? Feel free and write to us at mintgenie@htmedialabs.com