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Different Home Loan Repayment Options Explained

Highlights

  • Do you know that the structure of home loan repayment depends much on the type of property, interest rate?
  • Read here how these factors impact your repayment

Given the current property rates, the home loan amount will most likely be in the range of INR 20 lakh to INR 60 lakh. It will keep the Equated Monthly Installment (EMI) relatively high. It’s all good when you keep paying the EMIs on time. Not only the home loan outstanding balance reduces with each EMI payment but your credit score also increases. But if you skip the payment for about 6-7 months in a row, losing a home to the lender and a poor credit score will be just a formality.

However, you can avert all by understanding the home loan repayment before buying a property. What are the types of repayment and how you should go about them? We are here to answer these questions. Let’s read on!

How Many Home Loan Repayment Options Do You Have?

You can repay the home loan via EMIs for the time you choose to service the same. The structure of a home loan repayment varies based on the property you buy, the type of interest rate you choose, and when you refinance the debt. Understanding the repayment structure of all these will only help you plan better. So, let’s discuss the repayment options.

Home Loan Repayment Options Based on Property

People usually buy two types of properties – A ready to move property and an under-construction property. A ready-to-move property will have home loan EMIs consisting of both principal and interest amount. Whereas, the EMI for an under-construction property will have interest only till the time it is completed. In an under-construction property, the loan will be disbursed in tranches based on the stage of construction. Once it’s completed, the EMI will start having the principal too.

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Home Loan Repayment Based on the Type of Interest Rate

Home loans have two types of interest rates – Floating and Fixed. It’s up to you to choose from the two. In a floating interest rate, the rate of interest will change based on the change in market rates. But will it change your home loan EMI? No, the EMI won’t change! Then how will the rate change impact your home loan repayment? Well, the principal and interest portion of the EMI will change with the change in the interest rate. When the rate comes down, the EMI will see more deduction of principal compared to when the rate goes up.

If your home loan sees a rate fall for long, you could be free of debt obligations before the scheduled finish. The rate fall when sustained for long will mean more principal payment. This way, the outstanding balance will reduce fast and can help you close your home loan before the agreed closure time.

What about the fixed home loan interest rate? Well, the name suggests that the interest rate won’t change despite changes in market rates. But don’t think that it will be a cost-friendly home loan repayment option for you. It’s because the lender will charge an interest rate around  2-4% higher than a floating rate home loan. In the current scenario, a floating rate home loan can be taken at 7-8.50% per annum. So, a fixed home loan can come at an interest rate of around 9-13% p.a.

So, it is better to choose a floating rate home loan even as the rate will change from time to time. An example below will show you the massive difference in repayment between these two types of home loan interest rates. Let’s check!

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Example – Smita Bansal and Ravi Solanki apply for a 20-year home loan of INR 45 lakh each but at different interest rates. While Smita went for a floating rate of 7.80%, Ravi applied for a fixed rate of 10.50%. Let’s see how the home loan repayment pans out for both.

Home Loan Repayment EstimatesSmitaRavi
EMIINR 37,082INR 44,927
Interest OutgoINR 43,99,589INR 62,82,503

So, you could see a massive difference between the home loan repayment of Smita and Ravi. Smita is paying INR less 7,845 in EMI and her interest obligations are lesser than Ravi’s by INR 18,82,914.

What Changes Will You Have in Your Repayment During a Home Loan Balance Transfer and Part Prepayment?

A home loan balance transfer is a process by which you can transfer your outstanding home loan balance to another lender at a lower rate of interest. Whereas, a part prepayment means paying a certain portion of the outstanding balance. But in both cases, you have two home loan repayment options – whether to pay the same EMI or a reduced one. If you can pay the same EMI comfortably, continue to do so. It will reduce your interest obligations further. The example below only proves our point.

Example – You had taken a home loan of INR 45 lakh around 3 years ago at 8.50% per annum for 20 years. Now if you get a balance transfer offer at 7.90%, how much will you save in each of the two cases – when you pay the same EMI and when you pay the reduced EMI? Let’s find out!

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Repayment AspectsRepayment Estimates When You Pay the Same EMI After a Balance Transfer (In INR)Repayment Estimates When You Pay a Reduced EMI After a Balance Transfer (In INR)
EMI Payable @8.50%3905239052
Interest Payable @8.50%48,72,49148,72,491
Interest Paid Over 3 Years11,12,73411,12,734
Outstanding Balance42,06,87042,06,870
EMI Payable After a Balance Transfer @7.90%3905237538
Interest Payable After a Balance Transfer31,39,24234,50,930
Interest Paid Till Now + Interest Payable Post a Balance Transfer42,51,97645,63,664
Savings6,20,515        (48,72,491-42,51,976)3,08,827    (48,72,491-45,63,664)

Paying the same EMI even after a balance transfer saves you double the amount compared to when you pay the reduced EMI. The loan tenure will reduce to 18 years and 8 months (15 years and 8 months after a balance transfer).

Let’s stick to this example and consider it from a part prepayment perspective. If you make a part payment of INR 5 lakh when the loan completes 14 years, how much will you save in each of these two cases – when you pay the same EMI vs when you pay the reduced EMI?

Repayment AspectsRepayment Estimates When You Pay the Same EMI After a Part Payment (In INR)Repayment Estimates When You Pay a Reduced EMI After a Part Payment (In INR)
EMI Payable @8.50%3905239052
Interest Payable @8.50%48,72,49148,72,491
Interest Payable Till 14 Years42,57,30642,57,306
Outstanding Balance After 14 Years21,96,60221,96,602
Part Payment Amount5,00,0005,00,000
Outstanding Balance After Part Payment16,96,60216,96,602
EMI Payable After Part Payment3905230163
Interest Payable After Part Payment3,37,5344,75,123
Interest Payable Till 14 Years + Interest Payable After Part Payment45,94,84047,32,429
Savings2,77,6511,39,962

Here also, you will save double the amount on paying the same EMI after doing a part payment. The loan tenure will reduce to 18 years and 4 months.

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  • Home Loan Interest Rates December 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda6.85% - 8.25%
    Citibank7.13% - 8.03%
    HDFC6.90% - 7.65%
    ICICI Bank6.90% - 8.05%
    Indiabulls Housing Finance Limited8.99%
    Kotak Bank6.75% - 8.45%
    LIC Housing6.90% - 7.90%
    Piramal Capital & Housing Finance9.65%
    PNB Housing Finance7.50% - 9.20%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital7.50% - 8.75%