Samar, an IT engineer never misses a day at work. And it’s not because he loves his job, but he simply cannot afford to lose the job. Why, you ask? Well, he has numerous loans to pay off, the biggest one being his Home Loan.
There are several people like Samar who passionately work towards two primary assets: a decent apartment and a car. And such Samars of our country generally end up swimming in a sea of Personal Loans and other loans, scared at the very thought of losing their jobs.
A Home Loan is one of the biggest debts that you may take on in your lifetime. The pay-back period spans over 20-30 years and takes up more than half of what many may earn in a month. Paying off a Home Loan is a long process.
This systematic repayment of debt often pops up in the finance section of a news article as ‘home loan amortization’. Don’t let the technical term scare you. Read up as much as possible before you borrow the money. Because once you decide, you have to live with it for the greater part of your life.
Calculate your repayment amount and interest
A Home Loan is generally paid back in equated monthly instalments through post-dated cheques or ECS. The amount on the cheques differs based on the principal amount, interest and the tenure of your loan. The amortization calculator shows the annual or monthly payment table of your home loan. It also shows the total interest and amount to be paid on a monthly basis.
It is important not to believe all the pretty pictures the agents paint for you. You must do a thorough research of facts and figures, particularly when there are chances of running into huge losses due to ignorance.
First of all, don’t ever get sold on the tagline ‘low EMIs’. This usually means lower the instalments, longer the tenure, which means you ultimately have to shell out a huge amount towards ‘interest’ at the end of it all. It is therefore important that you try and minimise the tenure as much as possible after analysing the maximum amount you can afford to pay towards EMI.
According to a recent survey, the real estate market is finally going upwards due to a cut in Home Loan interest rates by the banks. While lower interest rates definitely stoked the interest of housing development investors, it means two things for the borrowers: lower EMIs or shorter prepayment tenure.
Work out the interest amount and then decide
While the agents may suggest you lower your EMIs, apparently to take some pressure off, we advise you not to be too hasty. It means that your tenure stretches even longer. Take a look at what happens when you opt for a longer tenure.
For example, you have taken a Home Loan of Rs. 20,00,000 for a tenure of 20 years. The interest rate is 11%. Use the same example but change the tenure to 15 years.
If you opt for 20 years, your monthly EMI will be Rs.20,644 and the total repayment will be Rs. 49,54,317.
If you choose a tenure of 15 years, your monthly EMI will be Rs.22,730 and the total repayment will be Rs. 40,91,542
So basically, by lowering your tenure by 5 years, you’re taking an additional EMI of Rs 2,086 only. While it may seem like a small difference, don’t underestimate its long-term impact on your savings.
Your total repayment for 20 years vs 15 years would show a difference of Rs. 8,62,775. Imagine how much money you may lose over the years, for a seemingly insignificant difference of Rs. 2,086 per month.
An ignorant Samar wouldn’t have made the effort to pay the additional Rs. 2,000 by reducing the tenure, like many other Samars. Interest rate and tenure are the biggest headaches for anyone paying off their Home Loans. It’s often possible to lose perspective among differing opinions of facts and figures. But a little nudge in the right direction will not only help you manage your personal finances better, but also result in some big long-term savings.
Additional Reading: Home Loan EMI Calculator: How It Works