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The 'smartest' home loan EMI solution
Anish Pillai
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July 13, 2007

Home loan EMIs can be a nightmare.

While you do have the satisfaction of knowing you will eventually own your home, you also have to grapple with having to spend less money, with fewer treats, with giving up on luxuries that you would otherwise have enjoyed.

We asked Get Ahead readers* to share their EMI stories and advice.

Here's Anish Pillai's take; he believes first time home loan borrowers could save money by adopting his 'smartest' home loan strategy...

Home loan repayments are increasingly becoming a matter of concern. Realty rates are on the expectational curve (moving up). Home loan interest rates are rising by the day and banks are coming up with various clauses (age-based, locale-based) to recover their dues.

You need to make smart decisions and plan your payments accordingly. At the same time, you need to ensure that your peace of mind is entirely in your hands.

Let's assume you have taken a home loan for Rs 10 lakhs at 11 per cent floating rate of interest for the tenure of 180 months.

In the table below, assuming your equated monthly installment is Rs 11,366, you will be paying Rs 20,45,880 at the end of 15 years.

However, because of the income tax benefit of Rs 6,02,508, your effective loan amount at the end of the loan term (15 years or 180 months) will be Rs 14,43,372.

 Scenario I

 Loan eligibility @ 11 per cent for 15 years  (approximately)

 Rs 10,00,000

 EMI (approximately)

 Rs 11,366

 Paid up amount in 15 years

 Rs 20,45,880

 Income tax benefit received

 Rs 6,02,508

 Effective loan paid up

 Rs 14,43,372

On the other hand, if you go for the 'smart home loan scheme' offered by various banks, the effective loan amount paid for the same amount and for the same tenure will be Rs 12,20,296.

This way, you can save a net Rs 2,23,076 (Rs 14,43,372 less Rs 12,20,296). The table below shows how this is possible:

Scenario II: 'Smart Home Loan'

 Loan eligibility @ 11 per cent for 15 years (approximately)

 Rs 10,00,000

 EMI (approximately)

 Rs  11,366

 Saving per month

 Rs  3,000

 Total EMIs saved (approximately)

 68 months

 Paid up amount (Approximately)

 Rs  12,67,575

 Amount in smart A/c

 Rs  3,33,000

 Income tax benefit received

 Rs  3,80,279

 Effective loan paid up

 Rs 12,20,296

Under the 'smart home loan scheme,' the lender asks you to open a savings account in the same bank. The next step is to deposit a fixed sum of money every month. In our example, we have taken it as Rs 3,000.

This is how it works -- by the end of 112th month, you will have paid Rs 6,67,000 as the principal amount. Remember, you are paying Rs 11,366 as EMI during these 112 months; part of this EMI goes towards repaying the principal and part of it towards the interest.

As the months pass by, the interest component in the EMI amount comes down and the principal component increases (for a detailed calculation of all the three scenarios read the 'smartest' solution).

By the same time, your savings account would have accumulated Rs 3,33,000 (Rs 3,000 * 111 months), which the bank takes towards the repayment of the balance amount.

This way, you would have completely repaid your loan by the 112th month, thereby saving 68 months of EMIs. That is Rs 7,72,888. No small amount by any stretch of imagination.

Isn't this method of paying back your loan a clear winner then? Yes, unless you read further.

Now let's look at a method where you open a recurring deposit account and deposit the same Rs 3,000 into that account. Most of the banks offer 8.75-9 per cent returns on recurring deposits. For simplicity's sake, let's assume your RD account fetches you a return of 9 per cent per annum.

Now, at the end of the 21st month of your EMI payment, you would have paid Rs 45,000 as the principal component of the loan. At the same time, your RD account will have accumulated Rs 63,000 (Rs 3,000 * 21 months). Withdraw Rs 55,000 from this RD and use it to make a prepayment.

This will not only help you avail of the maximum tax benefit (Rs 1,00,000, that is Rs 45,000 + Rs 55,000); it will also help reduce your loan amount by Rs 1,00,000.

Similarly, at the end of the 33rd month, you would have paid another Rs 55,000 through your EMI payments. And you would require another 45,000 to avail of the Rs 1,00,000 tax benefit limit.

Again, dip into your RD account. Before you forget, let's remember that, in the interim, you would have deposited Rs 36,000 (Rs 3,000 * 12) into your RD account that would have given you 9 per cent returns per annum.

By the end of 33rd month, you would have repaid another Rs 1,00,000 of your Rs 10,00,000 home loan.

This method will also help you prepay your Rs 10,00,000 home loan by the 112th month. The advantage is that you would have paid Rs 12,01,960; that is an additional saving of Rs 19,000 than what you would have saved under Scenario II.

It is because of the Rs 19,000 extra that you save as compared to scenario II that you can call this the best option for you. Of course, you will have to make some efforts in opening an RD account.

Rs 19,000 saved over a period of 112 months may not be a big deal but then if you are a home loan borrower in today's time then every penny saved is indeed a big amount. 

The other advantage, of course, is the tax benefit you have got with this method. Against a tax benefit of Rs  3,80,279 in scenario II, here you get a tax benefit of Rs 4,47,898. Not a bad deal.

Scenario III: 'Smartest Home Loan Taker'

 Loan Eligibility @ 11 per cent for 15 years (Approximately)

 Rs 10,00,000

 EMI (Approximately)

 Rs  11,366

 Saving per month in a separate recurring deposit a/c for 112 months

 Rs 3,000

 Effective value @ 9 per cent after 112 months

 

 After 6 prepayments as follows

 

 21st month : Rs 55,000

 

 33rd month : Rs 45,000

 

 45th month : Rs 45,000

 

 57th month : Rs 35,000

 

 69th month : Rs 25,000

 

 81st month : Rs 15,000

 Rs 2,20,000

 *Loan pre-closed @ 112 Month

 Rs 1,56,866

 Total EMI saved

 68 months

 Paid up EMI

 Rs 12,72,992

 Income tax benefit received

 Rs 4,47,898

 Effective loan paid up

 Rs 12,01,960

By doing this, the borrower can optimise his effective loan cost.

DON'T MISS!

Are you facing a similar problem? Have EMIs crippled your life as well? If yes, how are you coping? Are you cutting down on your monthly expenses? Are you borrowing to repay your loan?

What solution have you developed for your home loan problem? Share it with other Get Ahead readers.

We will feature the best and the most imaginative/ practical solutions to home loan woes right here. Make sure you include your FULL NAME, AGE, OCCUPATION, HOME LOAN AMOUNT, THE INTEREST AT WHICH YOU HAVE TAKEN THE LOAN and the CITY you are based in.

Your advice could help others manage their home loan problems. Write in now.

* This is a reader-driven feature. The views expressed by the  readers on this Web site are their own, and not that of Rediff.com. Rediff.com does not in anyway endorse any contents of the expression of the readers. Please therefore verify the veracity of all content/information on your own before undertaking reliance and actioning thereupon.


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