How to repay your Home Loan Smartly ?
If buying a Home is a dream, then getting a Home loan and paying the EMI(Equated Monthly Installment) for the next 30 Years is a disturbing moment. A Home that you bought through loan is not an Immediate Asset. Until you get into the loan of 30 years, it’s a Liability – but not as an Asset.
It is good to have a single home on Needs. It is not good while trying to buy 2 or 3 houses, buying a home for Tax Savings through EMI. Don’t forget that it can also lead to a Debt Trap.
If you have too much money on cash and planning to enter into the Real Estate business – Buying and Selling Property, Rental Property for generating higher Passive Income, then it’s your choice.
The Majority of the Middle class people are in Financial trouble, due to their loans, which is more than 50 Percent of their Regular Income. Home Loan, Personal Loans, Car Loan are long listed. However we should get out of the Debt soon.
Here, we can take an example about how to repay the home loan smartly but Practically. If a person getting a loan of Rs. 25 Lakh with the interest rate of 9.60 Percent for 30 Years Tenure, then his EMI Per Month amount is Rs. 21,204 /-
Now let’s look at the Loan Projection: When we are going to borrow Rs. 25 Lakh at 9.60 Percent Rate for the 30 Years period, the total interest amount would be Rs. 51,33, 440 which is 67 Percent of our Principal plus interest amount. The Total amount of EMI for the 30 Years would be Rs. 76,33,440.
If we plan for the same amount of loan and said interest rate for the 20 Year term, then the interest payable is Rs. 31,32,080 which is 55 Percent of the Total Payable amount. Here the Monthly EMI is said to be Rs. 23,467.
Therefore, as the Loan tenure increases, the interest payable will increase even though our EMI amount is considered as Less. When the loan amount is going to paid off quickly, then the Monthly EMI will increase and the same time the interest payable will come less.
Here, we can take two of our friends – Mr. X and Mr. Y. Both are planning to buy a home loan with an amount of Rs. 25 Lakh by the interest rate of 9.60 Percent. Mr. X have planned his loan tenure of 20 Years and Mr. Y had a plan of 30 Years period.
As we said earlier, for the 20 Years tenure the Monthly EMI is Rs. 23,467 – So Mr. X will pay this amount. For 30 Years loan tenure, the EMI is said to be Rs. 21,204 for Mr. Y follows. So, Mr. Y is paying less amount of Rs. 2,263 than Mr. X due to the term.
With both paying their monthly installments, the Total Installment amount (EMI) paid by Mr. X at the end of 17 years is, Rs. 47,87,222 (See the Table). For Mr. Y, the total EMI paid was Rs. 43,25,616 (17 Years). If Mr. Y had invested the difference amount of Rs. 2,263 monthly in an Equity Mutual Fund Scheme for the said 17 Years, now he will get a SIP Corpus of Rs. 21,27,253 at an assumed return of 15 Percent.
At now, there is an outstanding principal amount for Mr. X is Rs. 7,31,514 and for Mr. Y is Rs. 18,85,811. If Mr. Y is ready to settle his said outstanding principal amount with his SIP Corpus, then he will complete his loan and get the balance amount of Rs. 2,41,442 from the SIP Corpus. Where Mr. X have to pay the outstanding EMI for the next 3 Years.
Mr. Y has cleverly paid off his loans in 17 years with SIP Investing, while Mr. X had to pay off his home loan for the Entire 20 years. The Total Savings of Mr. Y is said to be Rs. 10.86 Lakh, which comes from SIP Corpus left after paying the Outstanding principal amount and EMI for remaining 3 years (Rs. 23,467 X 36 Months).
The important thing to note here is that the Lower Bank interest rates and the higher returns on Investing comes as a Matter. One who invests must also remember about Taxation and Inflation.
The Equity Fund Scheme cannot generate these type of 15 Percent returns in a short period. If one invests in the long term, then he can earn better returns. When it comes to Home loan and plan to repay his loan smartly – Don’t lookout for the Lower Returns Investment Instruments.
It works only if the Return on Investment is higher than the loan interest rate, we paid for Home Loan. So, one can plan on paying off his debt by considering it.
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