Lower EMI or Interest? What Should you Take? - Home Loan Blog - Tata Capital

Lower EMI is Good But Lower Total Interest Payment is Better

Mar 08, 2017

Lower EMIs on your home loan is good but Lower Total Interest Payable is Better. Surprised? After all, what can be better than having a lower home loan EMI?

But this is the truth. And most people focus only on EMIs and take actions that are penny wise and pound-foolish.

It's natural to think about reducing your EMIs so as to lessen the burden on your monthly finances. But this focus on getting EMIs reduced comes in way of your financial well-being.

Let's see why:

Suppose you purchase a house that costs you a total of Rs 37 lacs. Of this, the bank has given you a home loan of Rs 30 lacs. The interest rate being charged is 10%. On being asked about the loan tenure, you conveniently took the longest one at 25 years so as to reduce your EMIs.

So for 25 year tenor, your EMI is Rs 27,261.

Had your tenor been say 20 years or 15 years, your EMIs would have increased as follows:

EMI for 20 years - Rs 28,951

EMI for 15 years - Rs 32,238

So naturally, taking a longer tenor means lower home loan EMI. But what about the total interest that you pay over the loan tenure?

Let's see

Total Interest Paid for 25 years - Rs 51 lacs

Total Interest Paid for 20 years - Rs 39 lacs

Total Interest Paid for 15 years - Rs 28 lacs

So it's clear from above if you focus solely on getting a lower EMI, you will end up paying higher amounts as interest. So just to save a few thousands every month, you end up paying several lacs in extra money as additional interest to lenders.

This is the reason why you should not focus only on low home loan EMI. Savings of a few thousand might look good but it hurts in the long run (as seen above). If you can stretch yourself a little, then it makes sense to pay higher EMIs and save lacs (as well as have a loan of shorter tenor).