Lower EMIs or Longer Tenure? Home Loan Blog - Tata Capital

What does Lower EMI mean for Home Loan?

May 23, 2017

You might think that there is something wrong here. How come we are telling you that lower EMIs are something to be careful of? Isn’t it?

But in general, you need to be careful when you borrow. And more so when your EMIs are lower. It’s possible that you are missing out something important.

So what is it that is so important?

Let’s take a small example to help you understand it.

Suppose you purchase a house that costs a total of Rs 40 lacs. Of this, the lender will only give you housing loan for 80% of the cost and rest has to be provided by you as downpayment. So the loan you will get is about Rs 32 lacs.

Now the interest rate being charged is 9%.

Since you prefer low EMIs, your lender has told you that you can opt for a very long tenure loan and it will reduce the EMI. So you have decided to go in for 25-year tenure.

So for 25-year tenor, your home loan EMI is Rs 26,854.

But let’s see what you EMI would have been, if you had taken a loan for shorter tenure. Calculations show that EMIs will be as follows:

  • EMI for 20 years - Rs 28,791
  • EMI for 15 years - Rs 32,457

That was about EMIs. You can now know your EMI loan amount by using customized home loan EMI calculator. But what about the total interest that you have to pay over the loan tenure?

The answer is given below and its shocking:

  • Total Interest Paid for 25 years - Rs 48 lacs
  • Total Interest Paid for 20 years - Rs 37 lacs
  • Total Interest Paid for 15 years - Rs 26 lacs

No doubt taking a long tenure loan means lower EMIs (as in case of 25-year loan). But have a look at the extra interest you are paying! Its almost Rs 11 lacs more than what you pay in 20-year loan and Rs 22 lac more in case of 15 year loan.

This is the reason why its said that lower EMIs come at a cost. And the cost is huge.