S Rajasegarane (Wisdomwealthplanners.com), Financial Advisor, Pondicherry.
Most people choose the EMI option to repay house loan because they can't come up with the huge amount in one payment. Also, they choose this option to avail of income tax exemption. It is also true that most people are keen to repay the loan amount quickly.
Even though the repayment term chosen may be 15 years or 20 years, statistics show that most people make the loan repayment in 8 years. It is true that if you stick to the EMI schedule and repay the loan over a long period(15years/ 20 years/ 30 years) the interest component is very high. Let's understand this with an example:
· Let's say the housing loan amount is 25 lakhs
· The repayment term is 30 years(360 months)
· Rate of Interest is 10%
· The EMI is Rs 21.939
The loan amount is Rs 25,00,000 but with the interest amount you end up paying almost Rs 54,00, 000. The repayment schedule is made clear in the first table of Appx.1. The EMI amount is Rs 21,939. The EMI amount has two components, Rs 1106 towards repayment of capital and Rs 20,833 is towards repayment of interest.
So the wise thing to do is to look at ways to reduce the interest component considerably. So, here are a few options that you can explore:
Option 1- Increasing the EMI amount.
Instead of Rs 21,939 every month increase EMI by Rs 3061 to Rs 25,000. By doing this you'll be able to finish the housing loan repayment after 216 months. Just by increasing the emi to Rs 25000 p.m, you'll decrease the interest component by 25 lakhs.( see Appx.2)
Option 2- Increasing the EMI amount from the 2nd year onwards
In the first year, pay the EMI as per original schedule. From the 2nd year onwards, increase the EMI amount by Rs 5000 every year. Now you'll see that the housing loan repayment is over in 103 months instead of 360 months. The amount that goes towards interest is only 15 lakhs approximately. You are also saving about Rs 38.5 lakhs.(See Appx.3)
Option 3- Adding a big amount to the yearly repayment after Ist year
Here, You stick to the EMI schedule but add a bigger amount every year after the 1st year. For example, you pay 1 lakh per year towards capital repayment, from the 2nd year onwards, in addition to the EMI of Rs 21,939. This way the housing loan repayment is over after 159 months. The amount you pay towards interest is only Rs 19.21 lakhs and you save Rs 34.77 lakhs on the interest component. ( See Appx. 4).
Choose the option best suited to your financial profile and aim to take full possession of your house at the earliest, without paying a huge interest on the borrowed amount.