With the rates of interest rising on home loans every day, it is natural for borrowers to wonder whether to increase their EMI amounts or their home loan tenure. Such a spike in interest rates could prove detrimental for older borrowers as their option of increasing their loan tenure is mostly not sanctioned. This leaves them with the only option of increasing EMI amount and take on added financial burden. It is important, therefore, for borrowers to assess their income flow in order to take the right decision in such a situation. It is also possible for younger borrowers to increase their home loan tenure. While most lending institutions have a maximum tenure of 20 years, some exceptions have 25 years. In this regard you can arrange with the institution to sanction an extension of the tenure from the existing 20 years to 25 years. Your age of retirement will play an important factor in having this request sanctioned by the lending institution.
The option of prepayment
Both the above mentioned options cater to only a section of borrowers and, therefore, alternatives must be discussed. It is most ideal for borrowers to arrange for extra funds by means of informal sources such as selling of jewelry, land or salary arrears or bonuses. This fund must be accumulated for partial prepayment of home loan. Doing so will enable the borrower to retain the original EMI amount that he had signed up for and also the home loan tenure.
Increasing your EMI
One of the foremost factors upon which each option is dependent is the borrower’s age. Additionally, his financial situation and the future course interest rates on home loan is taking will also play key roles. If you decide to increase you EMI in the face of increased rates of interest you will be saved from the hassle of prolonging your loan tenure at the cost of paying higher rates for a longer time. However, a higher amount of EMI also means that you will put undue stress on yourself on a monthly basis. This may result in you having to sacrifice certain aspects of your lifestyle with which you are accustomed.
Increasing loan tenure
Even though rates of interest are on a steady rise in recent times, if they suddenly fall in the future, you can only benefit from this option. However, you will have to be prepared for the opposite of this too which is more likely to happen given the current market trends. Increasing the home loan tenure will keep increasing the total cost you incur on your home which may not be met with should you consider selling it. Additionally, borrowers of a more mature age will likely not even receive this option for lending institutions do not allow tenure extensions for those nearing the retirement age. Lending institutions also have a limit on the maximum tenure to which you can extend your loan.
Prepayment of the loan
Partial prepayment of the loan amount will require you to arrange for funds from elsewhere and pay a lump sum. This will reduce the outstanding amount of your loan and enable you to retain your original EMI amount and home loan tenure. The only con of this option is that raising that kind of money may require you to sell your financial assets that you hold dear. You may also be required to liquidate some of the investments you already have in the market.
However, partial prepayment is the best option to go for if your lending institution does not have a prepayment charge or if they do if it is not particularly exorbitant.