Smart ways to reduce the property loan burden

It is a great feeling to own the dream house. However, paying a significant portion of your salary for home loan EMI is a huge financial burden which weighs down a monthly budget of a person. And to keep paying the sum of money for the tenure of your property loan which is usually a period of 10 to 15 years, feel infuriating. So, how to lighten your debt burden? Here are easy steps save money in the long run.

• Closer look at your financial plan: Before considering a property loan and financing options, it is essential to have a closer look at your financial plans. Check the number of investments you have and the returns you are getting. If your investments are taking care of your short, medium and long-term financial goals, then you can think about directing the surplus towards the property loan. While choosing property loan, tools like home loan EMI calculator can help you get an idea about the amount you need to pay for your property loan.
• Higher down payment: While getting your loan sanctioned, opt for making a large down payment; it will help cut down the principal amount. Remember, interest payment is calculated on the principal. So, you will need to pay lower interest with the smaller principal, thus, lowering the burden of EMI. A large down payment might seem a bit difficult; however, it will prove beneficial in the long run, and you can save significantly in EMI payments.
• Research: A little time invested in researching about property loan companies before availing a property loan can help you find lower interest rate offers and save a lot. If you have already taken a property loan and want to lower the interest rate now, then you can think about the transfer of loan. You can go for other financial institution that might be willing to offer you a loan at a lower interest rate. Therefore, refinancing your property loan at a reduced interest rate can be a smart way to lower your interest repayment burden. Remember, you will need to consider the charges for switching the loan including legal fees, processing fees, etc. before finalizing your option. 
• Choose EMI amount and tenure wisely: Selecting an extended loan period means lower EMI, as principal and interest are divided over a longer period. You need to understand something important; you will have to pay EMI and interest even if your monthly income is less or inconsistent at times. Your monthly EMI amount can be smaller but you may have to pay more over your loan duration. On the other hand, shorter loan tenure will reduce your absolute interest payout; however, it will increase your EMI burden. So, go with the EMI amount that you can afford. Affordability should be your primary factor while selecting your loan EMI amount.
• Early Prepayment: This is the way to reduce your debt burden significantly. Prepaying part of your loan in the first months/years of the loan period can decrease your principal. Thus, you can save you interest on later payments. Furthermore, making partial payments whenever possible can help you save a lot in the long run. Another useful trick to reduce the burden is to keep the habit of planning one more EMI (than the usual number of EMIs) every year.

So, what are you waiting for? Think wisely and act smartly to ease your property loan burden.

EMIs – understanding the math

EMIs are a big part of our home purchase decision. We explain how a percentage of your monthly income pays the home loan. 

If you are about to take a home loan, you are justifiably worried about the ‘EMI’ you have to pay the bank every month. The higher the EMI, the higher is the deduction from your monthly income till the loan is completely repaid. The EMI computation can also get slightly tricky, so it is best to understand how your bank calculates the numbers.

The EMI (Equated Monthly Instalment) is an amount of money calculated by the lending institution after taking certain factors into account. These factors include, and are a combination of, the principal amount (P), interest payable (I), and total number of instalments (N). The loan tenure is calculated on the basis of the number of years chosen but in terms of the number of months.

Do note the formula that your bank uses to compute the EMI:

[P x I x (1 + I) x N] ÷ (1 + I) x (N-1)

Now suppose you seek a home loan of Rs 40 lakh (P) at an interest rate of 12% (I) for a tenure of 10 years, i.e. 120 months (N). You may use the formula above to arrive at the EMI calculation. Or if you don’t want to be bogged down by the mathematics of it all, simply use your bank’s online home loan EMI calculator to arrive at the estimated EMI payable per month.

Points to note about the EMI calculations:

1. The EMI does not comprise equal parts principal amount and interest. In the initial years of the loan, the interest component is higher. It gets correspondingly lower as the loan progresses, while the principal amount is higher.
2. Thus, you cannot think that half of your loan is repaid after 5 years out of a total tenure of 10 years.
3. The EMI structure is liable to change during the repayment tenure, for three reasons:

• You may opt for a floating rate of interest, which can reset the interest periodically.
• You choose to pay differential or staggered EMIs, i.e. lower amounts for a few years and then larger EMIs later. This option is offered only by a few financial institutions in India.
• You repay incremental amounts in addition to the regular EMIs. The prepayment amounts reduce the principal amount of the loan and the interest is recalculated on the balance amount.

Premier banks and housing finance institutions offer an online home loan calculator that makes the EMI calculations easy. All you have to do is fill in the numbers as prompted for a close estimate of the EMI you will pay for your home loan.