Home loans are the biggest responsibility that many take on in their lifetime. With a long term, most borrowers want to reduce their equated monthly payments (EMI). Here are some innovative ways for borrowers to reduce their EMI burden.
Higher down payment
The down payment is the first amount you invest in buying a home.
A larger down payment reduces the loan amount, giving the lender confidence in your financial situation.
Typically, a longer-term home loan would result in a higher interest payment. Even if your EMI amount is lower, you will end up paying more money.
Ideally, a lesser tenure with a higher EMI may be uncomfortable initially, would become easier over time.
Regular advance payments
NDEs consist of two parts. The amount paid as interest on the amount borrowed and repayment of principal. Initially, most of your EMIs are for paying interest and less for principal. The prepayment is an amount paid in addition to the EMI due.
When you make prepayments, the amounts are deducted from the principal, resulting in savings on future interest payments and a shorter term than the original agreement.
The standing instruction on automatic prepayment guarantees a small regular prepayment each month. A voluntary option, which can always be terminated, makes it possible to prepay the loan much earlier than the decided duration, which allows considerable savings
Let me show you how it works:
For example, Ajay takes out a loan of ₹10,000,000 at 10% interest for 20 years. The formula for calculating EMI is P × r × (1 + r)n/((1 + r)n – 1). Using this we get the EMI for Ajay at ₹9,650. As he pays his first EMI of ₹9,650, of which ₹1,317 goes to principal payment i.e. ₹10,000,000 and the remaining ₹8,333 to interest.
Over the months, although the EMI remains the same, the interest component decreases as you repay more and more of your principal (see table). However, if he chooses to prepay ₹1,000 every month, he will be able to close his loan in 184 months, saving 56 months of EMI and ₹3,58,494 for interest payments.
So, if Ajay acts smart, he can save ₹3,58,494 by just prepaying ₹1,000 per month. Prepayments would help a person to avoid the financial burden and automatic prepayment option would ensure easy management of financial planning.
The author is Director of Marketing, HomeFirst Finance Company
March 30, 2022