How to reduce tenure of home loan?

Moving into one’s own home brings in so much happiness that can be experienced but cannot be explained. Same is the case with Bhargav, enjoying the new house, the house warming session, the praises for the new furniture and the construction.

As the month dawns, no sooner he realized about the EMI. As the case with many, he has to fund his account to pay the EMI, as the money flew with other expenses and investments. It is then he placed himself as a fund manager of the house.

So, firstly, he made a list of all expenses and income sources; and also loan and investments. He found the expenses graph goes higher as and when there is an increase in the income. Also another insight was, he had investedReduce tenure of home loan in ULIP, PF,  which are low return sources. Because of this, he had opted for low EMI which increases the loan tenure. He thought investing in those and pay higher loan interest to somebody is not a wise decision. So he withdrew funds from PF and changed his endowment policy to a term plan with a little higher returns. This left him with enough funds. Now, he used the PF for paying the principal and the money saved from not paying the ULIP to increase the EMI.

Pre-payment:

Here, we found Bhargav taking a very clever step. He reduced his principal by paying some amount, at once (other than EMI). This is called pre-payment. This reduces the principal amount and in-turn reduces the interest amount.  Pre-payment can be done any time as there are no charges applied. You can use this option whenever there is an extra source of income like increment, gifts from family, savings from salary. 

A question arises is it worth using all the money saved to pay the principal. Yes, it is worth as you close the loan much earlier than agreed. But one should be sure that there is no other investment that gives you higher returns than the interest you are paying for the home loan.

Increase the EMI:

We also found that he had opted to increase his EMI.  This too reduces the tenure of the loan. Try to avoid unnecessary expenses and increase the EMI. Imagine finishing the home loan at the earliest. It is the most relaxing thought for sure. But don’t be enthusiastic. Be a judge for yourself. Don’t make the EMI a burden. 

Search for a lower interest rate:

Always note that you have to search for the lower interest rate and shift the loan. Follow the market trends and the interest rate. Even a .5% difference in the interest rate will reduce the tenure of the home loan by almost 30 EMI for a 20-years loan. Provided, you pay the same amount of EMI, though there is a decrease in the interest rate.

Reduce tenure of home loan

Know that there are always options to close your loan as early as possible. All you need is to get guided and monitored with careful steps and timely work. Realize that only after you finish your home loan, your house becomes YOURS.

Understand fixed vs flexible interest rates with examples!

Fixed vs flexible interest rates

The toughest decision to make while going for a home loan is deciding on which interest rate to prefer. As we know, Fixed rate has a constant interest rate during the whole loan period or fixed for certain number of years where as Flexible rate changes periodically with respect to the market. But there are pros and cons for both of them.


Fixed Rate :

Pros:

  • It is usually preferred when an individual doesn’t want to face any kind of financial risk.
  • It varies very little from lender to lender.
  • It is easy to understand.

Cons:

  • The interest rate would be higher when the market is on a higher trend, then.. 
  • the qualifying will be tough,
  • they will be less affordable, and 
  • the same higher rate remains, for the whole loan period, even when the market is on down trend or stable.

For example : Akshay bought a home for 50 lakhs. Out of 10 lakhs was payed as a down payment and 40 lakhs by a home loan. He took a home loan when the market is on the down trend and so, the interest rate is also lower, which is at 9%, ten years ago. Now the market is on the up trend, and the rates are higher. Akshay is saved from this financial risk of  increase in the interest rates.


 On the other hand, Abhinav bought a home for 50 lakhs. Out of which 10 lakhs was payed as down payment and 40 lakhs by a home loan. He took a home loan when the market is on higher trend and so,the interest rate is also higher, which is at 11%, interest ten years ago.  Now the market trend is stable and little on the lower trend, so the interest rate is 9%. But since the interest rate is fixed, Abhinav is paying 2% extra. 


So, when opting for a fixed rate as interest rate, take a wiser decision by knowing the trends of the market. This effects the number of years you are paying the home loan. Clever decision might increase to a decade or even reduce to half a decade. 


Note : Even fixed rates undergo changes after a certain time interval. It varies according to the individual lender.


Flexible or Adjustable Rate : 
Pros :

  • Flexible rate, initially is set a little lower than that of the fixed rate.
  • Depends on repo rate.When RBI increases the repo rate the interest rate would also be increasing. Moreover, this interest rate hike will not be for the entire tenure of the loan. Say you took a loan for 15 years. Over such a long time frame, interest rates are bound to fall.
  • Ceiling, i.e., this is the highest interest rate that the adjustable rate is permitted to become during the life of the loan.  

Cons :

  • It is complicated.
  • The monthly payment may change frequently over the period of the loan. Usually it is for every quarter, but it depends on the individual lender. For e.g., ICICI bank reviews it for every quarter.
  • With the change in the interest rate, you either have to change the monthly payment or change your tenure. i.e., if the monthly payment is constant then the tenure increases and vice versa.

Have to make a note of the review date.

Influence of Repo rate on flexible rate : 
Repo rate is the rate at which the RBI lends money to the financial institutions. So when there is a change in the repo rate, there will be a change in the interest rate. If there is an increase in the repo rate, i.e., the banks have to pay more interest, then they charge more from the customers, which increases the interest rate.


For example : Akash took a home loan of 50 lakhs with flexible interest rate of 9% when the fixed rate was 10.5%. Now there is a review of the rates every quarter. The revised rates are sent to Akash. It says, december – 9%, march – 9.05%, july – 9.15%, october – 9.01%, So, we observe a frequent change in the interest rate. This is depended on the market trend and the repo rate. But the flexible rate did not reach the fixed rate. Infact, it is very rare that the flexible rate would have drastic changes.


 As observed, there are pinholes in both the cases and also true advantages. Hence, regardless of the type of the loan that we select, we have to chose carefully to avoid costly mistakes.

Learn the home loan terms definitions in an interesting way!

Home loan terms definitions

Buying a new home with the help of a home loan is now very common. Since, there are n number of financial institutions to provide loan, there is a huge competition. So, it is very usual that this competition forces them to make the proceedings a little easier and a little convenient.


Recently, there is  a discussion among our friends about home loan, the process and the terms involved. The discussion started as Ajay wants to buy a new home with the help of a home loan. Aarav is already in a home loan, which helped Ajay to discuss all the basic terms about the same. The discussion goes on like this…


Ajay : Saw a house. All of our family members liked it. But it costs me a fortune. So, planning to go for a home loan.


Aarav : Ohh! Is it! So how much are you planning to pay as down payment


Ajay :  (New to all these terms) Down payment?!


Aarav : ( already in a home loan)  It is very important to know everything about home loan before you go for it. So, Down payment is the payment made in the form of cash as the initial payment, when you buy a home. The percent may vary from 5% to 25%, with respect to the seller. For the rest of the amount, you can arrange for a home loan. So, you should know how much cash you can pay before applying for a home loan.


Ajay : Hmm, So, what are the other things that I should know…


Aarav : OK… For the rest 85% say, you are going for a home loan from a financial institute. You know that, the financial institutes approve the loan after verifying your personal details and the property’s details. Now, before you apply, you should decide about the  interest rate for your loan. There are two rates which are depended on the RBI’s repo rate. They are, fixed and floating or adjustable.


Ajay : Oh, fixed interest rate is the rate which stays constant for the entire term, and floating is the rate which will change periodically with the market.


Aarav : Very true Ajay. This needs some research. So do before you decide.


Ajay : And next is the tenure.


Aarav : Is it just the number of years I take the home loan?


Ajay : Yes, ofcourse but, it is not just..there is a lot in it. Tenure depends on the EMI (Equated Monthly Installments) you can pay. Usually, EMI and tenure are inversely proportional. The more you opt to pay in a month, the lesser the years you will pay the loan. Tenure also depends on your age and length of the career. This is another aspect you should know about.


Aarav : Is there anything more to know and to check before I go for a home loan.


Ajay : Yes, the financial institutions charge processing fees. To get our work done, institutions do some ground work which involves documentation process, underwriting process, legal charges, etc. It usually varies from 0.25% t0 0.5%. Due to huge competition, there are some institutions which do not charge the fees.


Aarav : That’s interesting. Though minimal, we should try to reduce the cost in all means.

Ok, it is now my piece of cake to make a wise decision.

How to use home loan EMI calculator for calculating the EMI?

How to use home loan EMI calculator for calculating the EMI?

What is EMI?

Equated Monthly Installment – EMI for short – is the amount payable every month to the bank or any other financial institution until the loan amount is fully paid off. It consists of the interest on loan as well as part of the principal amount to be repaid. The sum of principal amount and interest is divided by the tenure, i.e., number of months, in which the loan has to be repaid. This amount has to be paid monthly. The interest component of the EMI would be larger during the initial months and gradually reduce with each payment. The exact percentage allocated towards payment of the principal depends on the interest rate. Even though your monthly EMI payment won’t change, the proportion of principal and interest components will change with time. With each successive payment, you’ll pay more towards the principal and less in interest.

Here’s the formula to calculate EMI:

where

E is EMI

P is Principal Loan Amount

r is rate of interest calculated on monthly basis. (i.e., r = Rate of Annual interest/12/100. If rate of interest is 10.5% per annum, then r = 10.5/12/100=0.00875)

n is loan term / tenure / duration in number of months

For example, if you borrow ₹10,00,000 from the bank at 10.5% annual interest for a period of 10 years (i.e., 120 months), then EMI = ₹10,00,000 * 0.00875 * (1 + 0.00875)120 / ((1 + 0.00875)120 – 1) = ₹13,493. i.e., you will have to pay ₹13,493 for 120 months to repay the entire loan amount. The total amount payable will be ₹13,493 * 120 = ₹16,19,220 that includes ₹6,19,220 as interest toward the loan.

Computing EMI for different combinations of principal loan amount, interest rates and loan term using the above EMI formula by hand is time consuming, complex and error prone. Our EMI calculator automates this calculation for you and gives you the result in a split second along with visual charts displaying payment schedule and the break-up of total payment.

How to use LoanYantra.com Home Loan EMI Calculator?

With colourful charts and instant results, our EMI calculator is easy to use, intuitive to understand and is quick to perform. You can calculate EMI for home loan and personal loan, education loan or any other fully amortizing loan using this calculator.

Enter the following information in the home loan EMI calculator:

  • Principal loan amount you wish to avail (rupees)
  • Loan term (months or years)
  • Rate of interest (percentage)
  • EMI in advance OR EMI in arrears (for car loan only)

Use the slider to adjust the values in the EMI calculator form. If you need to enter more precise values, you can type the values directly in the relevant boxes provided above. As soon as the values are changed using the slider (or hit the ‘tab’ key after entering the values directly in the input fields), EMI calculator will re-calculate your monthly payment (EMI) amount.

A pie chart depicting the break-up of total payment (i.e., total principal vs. total interest payable) is also displayed. It displays the percentage of total interest versus principal amount in the sum total of all payments made against the loan. The payment schedule table showing payments made every month / year for the entire loan duration is displayed along with a chart showing interest and principal components paid each year. A portion of each payment is for the interest while the remaining amount is applied towards the principal balance. During initial loan period, a large portion of each payment is devoted to interest. With passage of time, larger portions pay down the principal. The payment schedule also shows the intermediate outstanding balance for each year which will be carried over to the next year.

Floating Rate EMI Calculation

We suggest that you calculate floating / variable rate EMI by taking into consideration two opposite scenarios, i.e., optimistic (deflationary) and pessimistic (inflationary) scenario. Loan amount and loan tenure, two components required to calculate the EMI are under your control; i.e., you are going to decide how much loan you have to borrow and how long your loan tenure should be. But interest rate is decided by the banks & HFCs based on rates and policies set by RBI. As a borrower, you should consider the two extreme possibilities of increase and decrease in the rate of interest and calculate how much would be your EMI under these two conditions. Such calculation will help you decide how much EMI is affordable, how long your loan tenure should be and how much you should borrow.

Optimistic (deflationary) scenario: Assume that the rate of interest comes down by 1% – 3% from the present rate. Consider this situation and calculate your EMI. In this situation, your EMI will come down or you may opt to shorten the loan tenure. Ex: If you avail home loan to purchase a house as an investment, then optimistic scenario enables you to compare this with other investment opportunities.

Pessimistic (inflationary) scenario: In the same way, assume that the rate of interest is hiked by 1% – 3%. Is it possible for you to continue to pay the EMI without much struggle? Even a 2% increase in rate of interest can result in significant rise in your monthly payment for the entire loan tenure.

Such calculation helps you to plan for such future possibilities. When you take a loan, you are making a financial commitment for next few months, years or decades. So consider the best as well as worst cases…and be ready for both. In short, hope for the best but be prepared for the worst!