Home Loan: Owning a home is a dream for many Indians. But purchasing a home from scratch at a time when real estate prices are sky high is not easy. It’s the reason why most people lean towards a home loan to realise their dream. Home loans are high in amount and long in duration. It makes a borrower pay more on interest than the principal amount of the loan.
When a borrower takes a home loan, they pay equated monthly installments (EMIs) which they fix in proportion to their monthly income.
Since most home loans are for 20 years or longer, the borrower can also see an exponential rise in their monthly income over such a long period of time.
And here is how you can take advantage of it by increasing your EMI.
You will find that a small rise of as low as nearly Rs 100 a month can help you save nearly Rs 11 lakh on the home loan repayment amount.
At the same time, it can also significantly reduce your repayment time.
“It’s very poorly understood that a voluntary EMI hike, even a small one, is actually a powerful tool to accelerate your loan payments. Homeowners typically look at the pre-payment of home loans in terms of occasional lump-sum payments. These payments are subject to minimum payment rules,” says Adhil Shetty, Bankbazaar.com CEO.
He added, “For example, you can’t pay less than one EMI’s worth, or sometimes, two EMIs’ worth. And so such payments can lead to substantial erosion of savings even if they help homeowners accomplish the goal of being debt-free. But the same can also be achieved with a voluntary EMI hike once. It doesn’t pinch your pocket. It’s affordable and achievable. And it doesn’t deplete your savings.”
In this write-up, ZeeBiz will tell you how a small hike in your home loan EMI can save you huge amounts of repayment money.
Suppose you take a home loan of Rs 50 lakh for 20 years at an interest rate of 9.5 per cent.
Your monthly EMI will be Rs 46,607.
Against a principal amount of Rs 50 lakh, you will spend Rs 61,85575 on interest money, and your total repayment amount will be Rs 1,11,85,574.
But if you increase the EMI amount by Rs 96.06 a day, Rs 2,882 a month, or Rs 34,584 a year, you will save around Rs 11 lakh in 20 years on your repayment money. How?
If you increase your EMI from Rs 46,607 to Rs 49,489, or Rs 2,882 a month, your interest amount will be cut from Rs 61,85,575 to Rs 50,95,763, leading to a reduction in total repayment from Rs 1,11,85,574 to Rs 1,00,95,763.
It means that in 20 years, you will save as much as Rs 10,89,811 (nearly Rs 11 lakh).
It will not be the only advantage that you will have; with that increase of Rs 96.96 a day in your EMI, you will repay your 20-year (240 EMIs) home loan in just 17 years (204 EMIs), a stark difference of 36 EMIs worth Rs 46,607 each.
Since you saved Rs 10,89,811, you can invest it in an assured return scheme or high-risk investment options such as small-cap mutual funds.
If you are investing this amount in a SIP mutual fund plan for 17 years, your monthly SIP will be Rs 5,342. At an annualised return rate of 12 per cent, you will get the amount of Rs 35.68 lakh on maturity.
It means the amount you save on the home loan and invest wisely can also help you generate significant money.
Shetty put it with another example: “Take a Rs 50 lakh home loan at 9 per cent for 20 years where your EMI is Rs 44,986. If you pre-pay a 10 per cent higher EMI (Rs 4,498 more) or pre-pay a lump sum of Rs 500,000 just once in the 13th month of the loan, the net result is the same: your loan is paid off in 190 months.”
He added, “However, the first option is much easier. And if you invested your Rs 500,000 in an index fund returning 14 per cent on average, it would become nearly Rs 40 lakh in 16 years.”
A home loan plays an important role in helping you realise your dream of owning a home.
Since you spend a lot of your hard-earned money on repaying the home loan, you can devise ways to reduce the burden of it.
Increasing the size of the EMI is an effective and time-tested formula; it will not only save your money and loan repayment time to a great extent, but it will also provide you with the opportunity to invest money to make good returns.