Home loans are the biggest liability many take in their lifetime. With a long tenure, most borrowers are keen to reduce their equated monthly instalments (EMI). Here are some innovative ways for the borrowers to lower their EMI burden.

Higher down payment

A down payment is the first amount you invest in purchasing a home.

A bigger down payment reduces the loan amount, thereby providing confidence to the lender in your financial standing.

Shorter tenure

As a thumb rule, a longer tenure home loan would result in higher interest payout. Even if your EMI amount is less, 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 prepayments

EMIs are made up of two parts. The amount paid as interest on the borrowed amount and the repayment of the principal. Initially, most of your EMIs go into paying interest and less towards the principal. Prepayment is an amount paid over and above the EMI due.

When you make prepayments, the amounts are deducted from the principal resulting in savings on future interest payouts and lower tenure than the initial agreement.

Auto-prepay

Standing instruction on auto prepay ensures a small and regular prepayment every month. A voluntary option, which can always be cancelled, helps prepay the borrowing much earlier than the decided tenure, thereby saving considerably

Let me show you how it works:

For example, Ajay takes a loan of ₹10,00,000 at 10 per cent 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 as ₹9,650. As he pays his first EMI of ₹9,650, out of which ₹1,317 goes towards paying principal i.e., ₹10,00,000 and the remaining ₹8,333 towards interest.

As months go by, though the EMI remains the same, the interest component decreases on repaying more and more of your principal (see table). However, if he chooses to make a prepayment of ₹1,000 every month, he will be able to close his loan in 184 months, saving 56 months of EMIs and ₹3,58,494 towards interest payments.

So, if Ajay acts smartly, he can save ₹3,58,494 by just pre-paying ₹1,000 monthly . Prepayments would help an individual from the financial burden and Auto-Prepay option ensure handling financial planning easy.

The writer is Chief Marketing Officer, HomeFirst Finance Company

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