Got a question about your money? What you should or should not do with it?
Our expert Devang Shah has the answers. Got a question? Please write to us.
I took a home loan from one of the leading Indian banks for Rs 20 lakh (Rs 2 million). It is for 20 years with an Equated Monthly Installment of Rs 17,036.
I will get possession of my home in April 2007.
The bank decided to increase the rate of interest by 0.5% so it moved up from 8.25% to 8.75%.
Presently, my take home salary is Rs 38,000 per month. I have to pay Rs 18,400 as my life insurance premium and Rs 1,000 per month in a tax saving mutual fund.
In this scenario, should I opt for an increased EMI instead of increased tenure?
- Saurabh Jain
Hi Saurabh,
What are your other assets?
If you have financial assets already, then you may not want to increase your future liability and might be better off with higher EMIs. Why prolong the loan period if you can settle it soon?
If you don't have other assets, then I have a few more questions.
What kind of life insurance have you taken?
Is it a unit linked insurance cover or an investment bundled with a life cover?
Is Rs 18,400 an annual premium or a monthly premium?
I suggest you urgently review this with a good financial advisor because it might be an expensive policy for you.
By paying a higher EMI, what you are really saying is that you want to bear the increased costs right away and not postpone your expenses into the future. If interest rates keep rising, you will end up paying more if you increase your tenure instead of EMI.
Yet, you need to create a certain level of financial assets that you could sell and use if the need arises. If you pay a higher EMI now, you will not be able to do so. If in the near future, if a situation arises where you need money, it may not always be possible for you to borrow money right away.
All in all, it is really a question of repaying as early as possible and yet not putting your financial position in jeopardy.
To read the other query answered by Devang Shah, read Made the wrong investment?
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