For instance, if a 30-year old had borrowed Rs 40 lakh at the floating rate of 8 per cent for 20 years in 2006, his monthly EMI would have been Rs 33,458.
As the rates have risen to 11 per cent in two years, the EMI on the remaining amount would be Rs 40,726. Given such a rise, any relief for the consumers would be welcome.
However, though the monthly outflow would come down due to the reduced EMIs, the rise in tenure implies that the interest payout will be much more. Taking the same example of a 30-year old borrower, who has taken a home loan of Rs 40 lakh at the rate of 10 per cent for 20 years, the EMI will be Rs 38,601. The total interest payout over 20 years is Rs 52,64,208.
Since this person has age on his side, (as he is able to pay-off the loan by the age of 50 years) any increase in tenure will reduce his EMI burden. Now, say the same person had to take the same amount at the same rate of interest, but for 25 years, the EMI comes down to Rs 36,348.
In other words, your EMI has come down by a mere Rs 2,253 per month, while your loan tenure has increased by a good 60 months. In this case, the interest payout is Rs 69, 04, 409. That is, the interest burden shoots up by Rs 17 lakh. Certainly, these are not numbers that would inspire you to exercise such an option.
In fact, most financial planners would advise you against it. The basic idea is to reduce your payout to the bank, instead of increasing it.
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"Such a move is only advisable for people who have taken a loan and are finding it difficult to service it," said Suresh Sadagopan, certified financial planner. Accordingly, he added that the borrowers, who are finding it difficult, can initially exercise such an option.
But over a period of time, they should keep prepaying the loan by using the part pre-payment method to reduce their interest payout to banks.
Also, it is advisable to try and keep the monthly EMI to 30-40 per cent of your total salary outgo. This will allow you to have better control over the finances.