In
buying a home you do not only end up procuring more financial security for you
and the family but you also save lot of money that would have otherwise being paid
as rent to the landlord. Due to the rampant migration in the cities of India
and many shifting their location for job and education there is a necessity of
new homes which has further being boosted by the easy availability of home
loans.
In
an attempt to ride this wave the banks have simplified the procedure for home
loan financing which had lot of borrowers in the last decade. Banks finance
typically up to 85 percent of the property value and the rest 15 percent has to
be borne by the buyer or the borrower using his or her own finances.
The home buyers look at the interest rate and the equal monthly installments as the major affordability factor. Even then a pertinent question that haunts all the
home buyers is ‘How much did I end up paying for my dream home?’
This
answer has two components one of which is the interest and the principal that
the buyer has to pay and next is the tax implications. We will analyze the
issue from both angles.
Mr.
Sharma decided to buy a 3 BHK apartment in a posh locality of Bengaluru and he
got the apartment comparatively cheaper at a price of Rs. 63, 00, 000. He paid the 15 percent of the full amount as
the down payment which is Rs. 9, 45, 000. The remaining amount which comes to Rs. 53,
55, 000 had been borrowed from a bank by Mr. Sharma at a lower rate of 10.15
percent as the other bank offered him a higher rate of interest of 10.25 percent.
The full tenure of the loan was twenty years and the Equal Monthly Installment
(EMIs) for Mr. Sharma came to about Rs. 52, 210.
For
a home loan amount of Rs. 53, 55, 000 at the rate of interest of 10.15 percent
for duration of 20 years EMI will come to about Rs. 52, 210. At the end of the
tenure of the home loan period assuming that the rate of interest is fixed Mr.
Sharma will have to end up paying a whooping sum of Rs. 71, 75, 453 as interest
which makes him pay 135 percent of the principal amount which is about Rs. 1,
25, 30,453.
How
could Mr. Sharma possible avoid this situation? This would have necessitated an
extra surplus amount that Mr. Sharma needs to invest.
The
first option with Mr. Sharma is to foreclose the loan amount by pre-paying it
with some amount from his savings. By doing this he can invest the amount saved
from the lesser EMIs in different portfolio till he repays the full loan
amount.
The
second option is, he can invest his savings or the surplus amount somewhere in
a diversified portfolio and continue with the same EMIs that he was paying.
Let
us evaluate both the instances and scenarios and do a comparative analysis.
The
first instance:
If we consider that he prepays an amount of Rs. 5
lakhs by the end of the 5th year, his outstanding principal amount
Rs. 48, 17, 328 will be reduced to Rs. 43, 17, 328 and subsequently the EMI
will get reduced to Rs. 46, 791 where he can save up to Rs. 5, 419 per month
which Mr. Sharma can invest into diversified portfolios. This will make Mr.
Sharma save an amount of Rs. 22, 64, 732 at the end of the loan tenure and will
additionally save Rs. 4, 75, 420 on interest. In total this will make him save
a total amount of Rs. 27, 40, 152 at the end of 20 years.
The
second instance:
In
the second instance let’s assume that Mr. Sharma invests his savings and the
surplus amount of Rs. 5, 00, 000 into diversified portfolios and continues
paying the same EMIs for repayment of the loan amount. Assuming that the rate
of return is 10 percent and he saves Rs. 20, 88, 642 which is still lesser than
the amount of the first instance.
As
we see the first option is much more advisable out of the two options at hand
which will not only allow to save more money but also reduce the liability of
the loan to a great extent.
Home
loan repayment also entitles one of tax benefits under section 80 C of the IT
Act. which can be availed for the repayment of the principal amount. Section 24
B entitles one to get a tax benefit and a deduction of Rs. 2 lakhs which can be
availed for the interest paid on the self-occupied home. Under section 24 B the
interest paid on a loan for a second home is allowed for deduction.
Outlook:
Going
for a home loan is a long term commitment of liability and thus one should go
for a loan that is manageable in one’s finances. There are indeed lucrative
offers given by the banks to increase the borrowers but one should be careful
about the hidden cost. It is always wise to choose a home loan product that
does not disturb one’s financial standing.
