Economists, scientists and even Messers Pink Floyd have dabbled with the importance of 'Money' and 'Time.' However, now even the home buyer is grappling with the same question. What should one do? - Go for higher tenure or higher equated monthly installment (EMI).

In the last couple of years, interest rates have been rising consistently. Home loan borrowers -- both existing and potential -- are a baffled lot because of the sheer speed of the escalation.

Many may compare this situation to situations in villages where a villager borrows from the village mahajan (moneylender) and is never able to pay back because of the compounding high interest. The rising interest rate regime in the country today has brought this debt-trap literally to urban households' doorsteps.

Up three percentage points over the past-one-and-a-half year, the floating rate of interest on home loans has hit a high of 12 per cent from 9 per cent. Such a steep rise in such a short period has brought with it nightmares of the money lender -- if banks and housing finance companies do not increase the EMI, it becomes insufficient to cover even the interest component. A household that can't take on a higher EMI will theoretically end up paying in perpetuity.

So now looking at the table (given below) there will be increase in the EMI.

The other option would be increase in tenure. In a rising interest rate regime, banks have the ability to increase tenure only up to a point. Beyond that, if the interest rate continues to rise, the EMI becomes insufficient to cover the loan (interest and principal) and banks are forced to increase the amount of the EMI as well.

If we consider the normal lifecycle based on the relationship between age and earning capacity, we can have a generalised few conclusions:

RISING EMI BURDEN

Loan amount (Rs)	Period (Years)	EMI (Rs) in 2007 -- 9%	EMI (Rs) in 2007 -- 12%	Increase in EMI (Rs)	Period (Years)	Increase in EMI (Rs)	Period (Years)	Increase in EMI (Rs)
10,00,000	20	8,997.26	11,010.86	2,014	15	1,999	10	1,989
15,00,000	20	13,495.89	16,616.29	3,020	15	3,005	10	2,995
25,00,000	20	22,493.15	27,527.15	5,034	15	5,019	10	5,009
50,00,000	20	44,986.30	55,054.31	10,068	15	10,053	10	10,043
75,00,000	20	67,479.45	82,581.46	15,102	15	15,087	10	15,077
1,00,00,000	20	89,972.60	1,10,108.61	20,136	15	20,121	10	20,111

So if you are in the age group of 25-35, the option viable could be increase in the tenure since you still have many years in your earning phase. This is primarily because an excessive increase in the EMI option will adversely impact your monthly budget.

If you are in the in the age group of 35-45, the option viable could be increase in the EMI since you would be having a high savings ratio as compared to any other age bracket.

If you are in the in the age group of 45 and above, the option viable could be prepayment of loan since you have less number of years in your earning phase and you have certain savings which could be opted to make the prepayment. (Lumpsum Repayment of Loan).

TIPPING POINT

Particulars	Age Bracket
	25-35 years	35-45 years	45 years & above
Recommendation	Let the tenure increase	Let the EMI increase	Prepay a lumpsum

So prepayment of loan seems the most common solution but the age also has a major role to play. There are two ways in which one can deploy surplus funds to reduce the EMI. For maximum benefit, one can combine the two options. This depends on your age, outstanding amount, earning capacity, present liabilities, retirement age, etc.

The writer is head of financial planning at Sykes &Ray Equities and can be reached at kairav@sre.co.in.