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Say you took a 20-year, Rs 30-lakh, 9.5 per cent per annum home loan two years ago, and have paid off Rs 6.7 lakhs at Rs 28,000 a month.
If you now ask the lending institution for your amortisation schedule (or use the EMI calculator at http://propmart.com ), you will find that you have repaid a mere Rs 1 lakh of the principal.
Still Rs 28.9 lakh to go.
When the interest rate goes up to 11 per cent, you have two choices before you: Up your EMI (equated monthly instalment) to Rs 30,780, or extend the repayment period.
Hard to say which is better. Until someone tells you that with an EMI hike, you will have to shell out Rs 37.5 lakh as interest over the remaining 18 years.
While, if you extend the repayment period, leaving the EMI unchanged, your loan will run on for another 26 years.
As if this were not bad enough, your interest burden, too, will go up, to more than Rs 58 lakh; almost twice as large as the loan you took.
As a general rule, it is always better to go for a higher EMI. Specially if this pinches; as in the case of steep interest hikes on long duration loans which you do not wish to extend.
One last thing. A hike in the interest rate from 10 to 11 per cent, increases your interest liability by 10 per cent, not just one.
And that's before bringing compounding into the picture
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