Skip to main content

Home Loan Repayment Options

Tarun is a young professional working in a MNC. Tarun recently got married and he has bought a new flat. He has taken a home loan of Rs 30 Lakhs for 20 years and is paying an Equated Monthly Installment (EMI) of Rs 26,992.

Consequences of Interest Rate Hike
Tarun is a worried man nowadays. He has heard of all the talks of a rate hike doing the rounds in the market. If that happens his EMI on the home loan will go up.

Tarun is worried that if interest rates go up too much and too fast it might increase his EMI significantly. If the interest rate on the loan goes up Tarun can increase the EMI and keep the tenure of the loan same OR increase the tenure of the loan beyond 20 years and keep the EMI same. Not many banks will allow extension of the loan beyond 20 years. In that case the bank will have no option but to increase the EMI on the home loan. If the home loan EMI goes up much more significantly than expected it can affect Tarun's cash flows. Tarun will have to divert his cash flows reserved for other activities like children's education and marriage, retirement fund; towards servicing the home loan EMI. Such a situation can have a negative effect on Tarun's entire financial planning. Like Tarun, lot of people face this situation when interest rates rise rapidly and they are caught unaware. As they don't anticipate this sudden rise in the EMI; they don't have a backup plan ready to face this type of situation.

Home Loan Repayment Options


So how can people like Tarun plan the repayment of their home loans so that it gets over before the scheduled time? Banks offer various repayment options apart from the normal regular EMI repayment option.


Let us see how the use of different re-payment options will affect Tarun's loan tenure and interest savings on the home loan.

Repayment Options

Total Interest Paid

Interest Savings

No of Instalments Loan Gets over in

No of Instalments Saved 

 

When Original Loan is kept for 20 Years

3478026

 

 

 

0

 

 

 

240

 

 

 

0

 

 

  

 

When EMI is increased by 5% every year

2192086

 

 

 

1285940 (37%)

145

 

 

 

95

 

 

  

 

When EMI is increased by 10% every year

1762469

 

 

 

1715556 (49%)

113

 

 

 

127

 

 

  

 

When 10 Lakhs Prepayment is made and EMI is kept constant at 26991.78

1047781

 

 

 

2430245 (70%)

113

 

 

 

127

 

 

  

 

When 10 Lakhs Prepayment is made and EMI is reduced to Rs 17911

2353215

 

 

 

1124811 (32%)

240

 

 

 

0

 

 

  

 

When EMI is increased for 1st 7 years till EMI reaches 36,172 and then kept constant

2277489

 

 

 

1200537 (34%)

157

 

 

 

83

 

 

  

 

Let us take a look at each of the above options available to Tarun to repay the home loan in more detail.

1) Step-Up EMI by 5%
Under this repayment option the customer can increase his EMI every year by a certain percentage. An employee expects his salary to increase by an average 10% or so every year. With the increase in salary he will have additional resources at his disposal. He can use this monthly additional cash inflow to increase his EMI every year so that he can clear the loan before the original scheduled date.

Tenure Gets Reduced: If Tarun goes on increasing his EMI by 5% compounded every year, then his 20 year (240 payments) home loan will get over in 12 years (145 payments). So number of instalments will get reduced by 95 (240 – 145).

Interest Savings: On the original loan of 20 years Tarun would have paid an total interest of Rs 34,78,026. But if the EMI is increased by 5% compounded every year then the total interest paid on the loan will be Rs 21,92,086.73. This will result in interest savings of Rs 12,85,940.15 (37%) for Tarun.

2) Step-Up EMI by 10%


Tenure Gets Reduced: If Tarun goes on increasing his EMI by 10% compounded every year, then his 20 year (240 payments) home loan will get over in the 10th year (113 payments). So number of instalments will get reduced by 127 (240 – 113).


Interest Savings: On the original loan of 20 years Tarun would have paid an total interest of Rs 34,78,026. But if the EMI is increased by 10% compounded every year then the total interest paid on the loan will be Rs17,62,469.91. This will result in interest savings of Rs 17,15,556.97 (49%) for Tarun. Please note that here in this case the overall interest paid on the loan will almost get reduced to half of the original interest amount.

 

Popular posts from this blog

L&T Income Opportunities Fund dividend

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 L&T Income Opportunities Fund declares L&T Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( R /unit) L&T Gilt Investment-DQ 0.3 L&T Gilt Investment Direct-DQ 0.3 L&T Income Opportunities Ret-DQ 0.31 L&T MIP-Wealth Builder-DQ 0.3 L&T MIP-Wealth Builder Direct-DQ 0.3 L&T MIP-DQ 0.3 L&T MIP Direct-DQ 0.3 L&T Short Term Opp-DQ 0.26 L&T Short Term Opp Di...

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now