- Want to know how you should approach your housing loan throughout its lifetime?
- If so, read the approach here and save on your interest payments over time!
The answer to this question will depend on how much the proposed Equated Monthly Installment (EMI) is taking out from your Net Monthly Income (NMI). Generally, lenders like to disburse housing loans to an extent that the proposed EMI remains within 60% of your NMI. If we believe that the salary of INR 55,000 is a net one, the maximum EMI permissible should be INR 33,000. So, if you are asking for an INR 40 lakh loan, the EMI could be around INR 34,334-34,713 for 20 years (assumed) given the interest rate of 8.35%-8.50% that prevails now for the said quantum of loan. In this case, the EMI is constituting a shade over 60% at 62%-63%. As the desired NMI/EMI ratio is deviating just a little, you won’t have problems in accessing the loan. But there are other options too, including a longer tenure to match the desired EMI/NMI ratio. But how will they fare to you? Take a look.
What If You Pay More in Down Payment?
You should know that housing loans are not financed fully. Lenders finance around 75%-90% of the property cost. Loans upto INR 30 lakh and above INR 30 lakh-75 lakh are financed at upto 90% and 80% of the property cost, respectively. Whereas, loans above INR 75 lakh are financed at upto 75% of the property cost. In your case where you are asking for a INR 40 lakh loan, the cost of your property could be INR 50 lakh if we follow the theory mentioned above. This means you’ll be paying INR 10 lakh to the seller as a down payment.
This is where you can create an opportunity for yourself. Yes, if you have savings that can help you pay more than the amount required for a down payment, you should do that. That will mean a reduction in the outstanding loan amount as well as the interest outgo.
So, if you can pay INR 15 lakh in down payment, do that to reduce your loan quantum to INR 35 lakh. At the rate of 8.35%-8.50%, the EMI would be INR 30,042-30,374 for a tenure of 20 years. This will lead to an interest obligation of 37,10,165-37,89,715, which is significantly lower than INR 42,40,188-43,31,103 on an INR 40 lakh loan for the said tenure. You can save as much as INR 5,30,023-5,41,388 on curtailing the loan to INR 35 lakh by paying more in down payment.
Lenders May Tell You to Increase Your Loan Tenure- But Shall You Do It?
In case you don’t have extra savings, the lender might tell you to increase your loan tenure from 20 to say 30 years. This will mean a much lower EMI that you will find very easy to pay. But falling to that lure would mean you will be paying much more interest to the lender. An example below will help you understand better.
If you extend the tenure to 30 years, the INR 40 lakh loan will bring down the EMI to INR 30,332-30,757 from INR 34,334-34,713 on a 20-year loan at 8.35%-8.50% interest rate. However, the 30-year tenure will increase the interest obligations to 69,19,639-70,72,354. If you see the extent of the increase, it is around 32,09,474-32,82,639. Humongous, isn’t it? So, extending the tenure is not good to you financially.
Shall You Look to Prepay the Loan?
Assuming you take the loan of 40 lakh for 20 years at 8.35%-8.50% interest rate. In that case, the EMI is such that you need to be careful of your expenses. This is where you can channelize the growth in your income better. Ensure you invest the rise in your income in fixed deposits, mutual funds or any other as per your risk appetite. The investment yields can help you accumulate a large sum of money to prepay the loan during the course of it. You may find short of arranging the sum that will help you wipe off the outstanding balance in full. But with planned savings, you can pay the balance in parts and reduce your interest obligations. The benefit of it is illustrated below, take a look.
Example – You generate around INR 5 lakh over 10 years to pay. The outstanding loan balance will most likely be INR 27,87,202-27,99,752 at the end of 10 years. Till that time, you will most likely pay interest worth INR 29,07,297-29,65,305. If you pay INR 5 lakh, the balance will reduce to INR 22,87,202-22,99,752. This will lower the EMI to INR 28,175-28,329 for the next 10 years. The interest obligations will be INR 10,93,783-11,21,884 for the said period. If you add the interest you have paid so far to the one you will pay for the next 10 years with the new arrangement, the total outgo will be INR 40,01,080-40,87,189. This is INR 2,39,108-2,43,914 lesser than 42,40,188-43,31,103, which will be the case without this new arrangement.
Can You Finish the Loan Before 20 Years?
Sticking to the situation post prepayment, you will have 10 years to pay off the outstanding loan. Now, you can use the growth in your income to good effect. If we factor in the 10% rise in your income every year, your salary will most likely rise to INR 1,42,655.84 (approx.). Surely, this will increase your ability to pay more on EMI. You can use it to bring down the remaining tenure to 5 years. This will increase the EMI to INR 46,760-47,183. The interest liability for 5 years will be INR 5,18,414-5,31,224, which is INR 5,75,369-5,90,660 lesser than 10,93,783-11,21,884, which will be the case if you continue the loan to the next 10 years after prepayment as stated above.