Why it is better to prepay part of your home loan EMIs regularly

livemint.com:

₹60 lakh home loan from a private sector bank for buying an under-construction flat in 2017. The interest rate on the loan was 8% at that time. He took possession of the flat in August 2019 and made a prepayment of about ₹10 lakh.

During the pandemic, he transferred his loan to a public sector bank. He was charged an interest rate of 6.5%. But interest rates have been soaring since then and has gone beyond 9%.

“The bank informed me about the revised rate only via mail but there were no details about the revised tenure or an option to increase the equated monthly instalments (EMIs)," says Bhattacharya. Bhattacharya, though, plans to prepay the balance principal amount at the earliest.Not many borrowers will be able to do that unless they have a significant amount in savings.. Interest rates “Borrowers are anxious about getting the maximum possible loan amount when they buy a new house," says Raoul Kapoor, co-CEO of Andromeda.

And that is where the problem begins. When interest rates rise, lenders tend to increase the loan tenure and that is their default option. In cases where the principal loan amount is high, the tenure then stretches to several years.

To be sure, the EMI consists of both interest amount and the principal. A major part of the EMI goes into paying off the interest and the remaining to clear the principal amount. In the new scenario, the EMIs will barely cover the interest component of the loan amount.

And any unpaid interest gets added to the principal. It results in a situation wherein the borrower is unable to repay the loan and defaults on payments. This phenomenon is called negative amortisation.