Know benefits of paying higher home loan EMIs

Buying a house without a home loan is difficult. To allocate a part of one's income in buying a house by taking a loan is deemed a wise economic decision. However, irrespective of decreasing home loan rates, repaying the loan on time can be difficult due to the high cost of living and an unnecessary tendency of spending on frivolous items.

Depending on the size and location of the house that you are planning to buy, your home loan can range from a few lakhs to a few crores of rupees. The maximum tenure of a home loan is 30 years, which means that you may pay your home loan EMIs for a full 30 years or before that.

The home loan EMI consists of both the principal and the interest components. The interest component is higher than the principal during the initial period while the principal component is more than the interest component during the later years of home loan repayment. While the EMI that is to be paid is calculated by the lending bank or the housing finance company, it makes sense to pay higher EMIs during repayment of the loan amount.

Benefits of paying increasing EMIs towards home loans

Many people argue that paying higher EMIs than those stipulated can be difficult in today's economy marred by inflation and rising rates. However, there are multiple benefits of paying higher EMIs that explain why it is worth the effort to pay them by cutting down all unnecessary expenses and pooling returns earned from various investments. These include:

Quick loan repayment: A home loan is essentially a liability that needs to be paid off. Paying higher EMIs means that you can repay your loan within a shorter period. Pavan Gupta, CEO, Muthoot Housing Finance Limited, says, "Higher EMI results in a higher reduction in principal which reduces interest liability. Paying higher EMI allows quicker repayment of the loan and so lower overall interest outgo. Like, 'Step-up' schemes, wherein EMI increases in anticipation of higher earnings, over the loan tenure."

Savings on interest component: Paying off the EMIs means that you are paying the interest towards the loan taken. This means that quick repayment of loan helps you save on the interest cost. Jagdeep Mallareddy, President & Head Retail Lending, Axis Bank, says, "Any instalment (equated or otherwise) consists of two components - principal and interest. Every month, the customer is charged interest based on the outstanding principal amount that the customer owes to the lender. While availing a loan, if the customer opts to pay more principal amount, the interest cost will get reduced."

Tax benefits: You can lower your tax liability with home loan repayment options too. Many people erroneously opt for lower EMIs, thus, missing out on their tax benefits. Vineet Patawari, co-founder, stock analytic app StockEdge and financial market learning portal Elearnmarkets.com, says, "Bigger is better in case of your EMI payment. With lower EMI, the tenure increases substantially, and you end up paying a huge amount extra as interest."

Credit score: There is a lot of debate regarding the credit score though not many are aware of what exactly it is. Keeping aside the definitions lent by financial experts, the credit score is the financial ability of a person to pay off his or her liabilities within the stipulated period. Paying higher EMIs ensures that you can repay off your loans quickly within a shorter period. Ratan Chaudhary, Head of Home Loans, Paisabazaar.com, says, "Home loan borrowers should consider their repayment capacity before opting for a home loan with shorter tenure and higher EMIs. Any default or delay in repaying EMIs is reported to credit bureaus and this would pull down credit score by a few points. Remember that credit defaults remain listed in the credit report for years, and this may hurt future loan prospects and credit card eligibility prospect for a considerable period. As a preventive measure, home loan borrowers should include at least six-month equivalent of their EMIs in their emergency fund. This will help them in coping with EMI repayments during financial emergencies or loss of income." A higher credit score implies your increased creditworthiness for any other form of loan that you apply for.

Better use of excess money earned: One may argue that paying higher EMIs with fixed income is difficult. However, yearly appraisals or an additional source of income means that you have more money in your hand. Instead of splurging the money on lifestyle expenses, you may consider allocating the extra amount towards paying higher home loan EMIs, thus, allowing pre-payment of the loan taken. Navin Chandani, CBO, BankBazaar says, "Your loan is recalculated each time the rate is revised upwards or downwards. Usually, the banks change the tenor keeping the EMIs unchanged. The better option is to retain your tenor and increase your EMI if you can, as this would give you better savings."