A research shows that 68% of total Indian population is willing and is ready to take Home loans from various financial institutions. These figures demonstrate the fact that the home loan is now becoming more reachable and affordable for people from all income layers.
While taking a home loan is this affordable, a very important point that most of the millennials are missing on is, the ability to repay. While many banks limit maximum home loan tenure to 25 years, few banks provide the feasibility of repaying the loan in as many years as 40! Remember the longer the tenure is , the more interest paid to bank! ☹
Regardless what is set as limit by bank, is it really possible for us to define how soon we can repay the home loan? If you read this article till end, yes, you can. Though the home loan is for 25 years, by repaying it in disciplined routine we can reduce the total repayment amount by a whopping %.
Sounds magical? Let’s see how to do this magic & who does this magic basically 😊
Let’s say Ms. S took a home loan of 40 L, for 25 years, with an interest rate of 8%. Her EMI is Rs 30,873 per month. Now at the end of the tenure Ms. S would end up paying Rs. 92,00,458. Ms. S repaid his principal amount anyway, but also paid interest amount of 52L in excess.
How do we reduce this?
1 straight way of doing this is to go with short term such as 15 years, which will increase the EMI by 8K. Just by paying 38,226 per month, for 15 years, Ms. S would pay 68 L to the bank. The interest paid in this model is exactly 24 L Lesser than the 25 years model.
But Ms. S is like me .. Doesn’t want a compulsion on how much to pay. She wants to have a free hand so she can determine how much to pay to the bank.
Then, by all means we can reduce the tenure without having to increase the monthly EMI amount, but we need to know a very little amount of math and a background to the interest component in EMI amount.
So when we start a home loan for 25 years, for the first 15 years, more than 80% of the EMI amount goes towards the interest amount and less amount goes towards the principal amount. The interest amount during this period is computed on the basis of balance principal amount. Isn’t this a fantastic strategy for banks! (Ms. S may eventually drop the idea of buying a home, but start a bank! ) 😊
How to reduce the tenure of the home loan without increasing the monthly EMI amount.
So Ms. S pays a monthly EMI of 30 K to the bank. If only she can manage to pay 1 extra EMI every year, then this extra EMI gets reduced fully from the Principal amount! This way, the total amount she will end up paying at the end of her tenure is 79 L INR, but not 92 L as explained in the beginning. That’s a straight reduction of 14% reduction from the original amount.
Why does this happen? Is Simply because the monthly EMIs are largely contributing towards the interest whereas the extra EMI that she pays is a direct hit on the principal amount … How cool is that!!?
Another perk? How hungry we are !
Fine, another perk here is that the actual loan which is supposed to go on for 25 years , now in this method, will need only need 19 years and 9 months. Apprx 20 Yrs.
How to reduce the tenure of the loan by increasing the monthly EMI amount by your choice of %.
We all are growing. Isn’t it true? No, don’t look at your weighing machines! When I say growth, it’s the year-year increments at work or developments in business etc. If Ms. S decides to increase the EMI amount by a nominal 5% every year, what happens? Sheer Magic takes place! By doing this, she can reduce the total interest to 29 L, from the initial discussed 52L. That’s a straight saving of 23 L, 75%!!
And how much she is increasing on the EMI: Year 1 – 30877, Year 2- 32416 , Year 3 – 34037 … Hardly 1,500 Rs increased from year to year.
Perk again? Yes, we have!
The loan that was tenured for 25 years, will last only for 13 years and 5 months if we go on increasing just 5% of EMI every year.
This is the magic… and who did it, of course Ms. S did (She always does)! If she can, then so you can !!
It is always the small numbers which contribute to a massive difference.
You keep an eye on the small change, I will keep looking for cool stuff to write about.
Signing off.
tea biscuits at 3 PM 