synopsis

    
  • A home requires a large capital outlay.
  • It makes sense to take a home loan to meet the purchase value of the home.
  • Your home loan is repaid through equated monthly instalments, or EMIs.
  • Each EMI is made up of interest payable on your loan and part principal repayment.
  • Taking a home loan during your Twenties or Thirties gives you sufficient time to pay off your loan before retirement.
  • How you time your monthly EMI payments plays an important role in your cash flows.
  • Make sure you have an emergency fund so that your EMI payments are not impacted in case you face such a situation.
  • It’s advisable to limit your loan payment to a maximum of 40% of your monthly income.
    

Being a homeowner is one of the most fulfilling experiences for most people. Since this requires a large capital outlay, it makes sense to take a home loan to meet the purchase value of the home. This not only does away with having to wait for years to accumulate the necessary amount to purchase your home, a home loan also provides attractive tax benefits.

Now that you are convinced about the benefits of taking a home loan, what about home loan repayment, you may ask. How do home loan repayments work? There are a number of home loan repayment options that you could consider. However, before we discuss this, let’s understand how home loans are repaid. Your home loan is repaid through equated monthly instalments, or EMIs. This is a fixed amount you need to pay your lender each month till you complete repaying your home loan. Your EMIs will be due on a fixed date each month (for example, say 3rd of each month). You need to pay EMIs throughout the loan tenure till you have paid off your home loan.

Each EMI is made up of interest payable on your loan and part principal repayment.Although the EMI remains a fixed sum throughout the loan tenure, during the initial years, the interest component of the EMI is higher (and the loan repayment component is lower). When you are closer to completing your home loan repayment, the situation reverses, i.e. the principal repayment component of your EMI is higher while the interest component becomes lower.

constructions

Here is an example to see how EMI is computed and the break up between interest and principal (with interest reducing over the years, while principal repayment increasing):

Let’s say you have taken a loan of Rs. 25 lakh for a tenure of 20 years at 8.6% interest. Your EMI will be Rs. 21,854. Here is break up of your EMI over the 20-year loan tenure.

Year Opening Balance EMI*12 Interest paid yearly Principal paid yearly Closing Balance
1 2,500,000 262,249 213,092 49,156 2,450,844
2 2,450,844 262,249 208,694 53,555 2,397,289
3 2,397,289 262,249 203,903 58,346 2,338,943
4 2,338,943 262,249 198,682 63,567 2,275,376
5 2,275,376 262,249 192,995 69,254 2,206,122
6 2,206,122 262,249 186,799 75,450 2,130,672
7 2,130,672 262,249 180,048 82,201 2,048,471
8 2,048,471 262,249 172,693 89,556 1,958,915
9 1,958,915 262,249 164,680 97,568 1,861,347
10 1,861,347 262,249 155,951 106,298 1,755,049
11 1,755,049 262,249 146,440 115,809 1,639,240
12 1,639,240 262,249 136,078 126,170 1,513,069
13 1,513,069 262,249 124,790 137,459 1,375,610
14 1,375,610 262,249 112,491 149,758 1,225,852
15 1,225,852 262,249 99,092 163,157 1,062,695
16 1,062,695 262,249 84,494 177,755 884,940
17 884,940 262,249 68,590 193,659 691,280
18 691,280 262,249 51,262 210,986 480,294
19 480,294 262,249 32,385 229,864 250,430
20 250,430 262,249 11,819 250,430 0

Let’s now consider your home loan repayment options.

EligibilityThe earlier the better

Taking a home loan during your 20s or 30s gives you sufficient time to pay off your home loan before retirement. Besides, you have the option for a longer tenure home loan, which, in turn, implies a lower EMI for the same loan amount.

Example of subventionTime your EMI

How you time your monthly EMI payments plays an important role in your cash flows. If you are employed, your EMI should coincide with your salary date.If you are self-employed, make sure you have the necessary funds in your bank account to meet the EMI payment. Ensuring timely payment of your EMI helps you escape any extra charges arising out of delayed payments and protects your credit score.

Example of subventionPrepare for emergencies

Your financial plan should necessarily help you accumulate an emergency fund which is immensely useful in case of medical emergencies such as hospitalization, accident, etc. This will ensure that the funds you have kept aside for your EMI payments are not impacted in case you face such a situation.

How to claim the subsidyLimit your EMI

If you have any other loans that you are servicing, e.g. car loan, personal loan, etc., the EMI computed from the home loan EMI calculator should be added to your other loan EMI payments to assess how much of your total earnings are earmarked for loan repayments. It’s advisable to limit your loan payment to a maximum of 40% of your monthly income.

Your home loan repayment can be made easy, stress-free and convenient if you simply plan your cashflows smartly and stick with it.

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