Home Loans in India, EMI and loan repayment [Lessons 101]

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Not all of us are informed and aware of the terms that are used in a home loan or how a home loan will affect our lives in the future. People who are not from a finance background may not even understand some of the most basic home loan terms used in India. (So, if you are one of those who know about Home Loans and how it works, this article may not be for you )

Keeping that in mind, we bring to you lesson 101 in home loans and 4 key terms that go with it. These key terms have been explained in a simple manner without the use of technical jargon, just the way you like it!

EMI

EMI or equated monthly installment is the amount of repayment that you will have to make to your lender every month. You should also know that an EMI is made up of:

  1. Principal amount portion
  2. Interest portion

The % of the principle amount and the interest amount in your EMI will vary over the life of a loan. As a borrower, you can request a breakup of the same from your bank to get an idea of how much interest you will be paying as the years go by.

As the borrower of a home loan in India, what you need to be aware of, is to make conscious provision for EMIs in your monthly budget. For example, let’s consider you take a home loan with an EMI of Rs. 20,000. Your monthly salary is Rs. 40,000. Your household comprises yourself and your wife, a caring homemaker. The EMI may seem affordable to you right now, but what about the time when you have kids in the future? Will the increase in your salary be competent enough to meet the increase in expenses?

As a general rule of thumb, an EMI which is 30% or less of your total income is acceptable when it comes to budgeting and forecasting cash requirements for your personal financial position.

Down Payment

As scary as the word ‘Down Payment of a home loan’ sounds, it is actually the opposite. A down payment will be your best friend when it comes to reducing the EMI which will be a bore on your pocket in the future. Essentially, a down payment is the amount of cash your will pay for your home from your pocket.

Generally, banks fund up to 80% of the value of a home. In simply words, if you are going to buy a home worth Rs. 30 lakh, the bank will fund 80% or Rs. 24 lakh. This makes your down payment a whopping Rs. 6 lakh.

As a borrower of a home loan, you need to know that higher the down payment, the lesser the burden of EMI and debt on your shoulders over the life of the loan. In the above scenario, if you had made a down payment of Rs. 10 lakh, your EMI would have been significantly lower.

The most recommended way to achieve this is through savings. Yes, there are banks and institutions who offer loans or credit facilities for the down payment itself. Some common ways and means to raise debt for the down payment are getting loans on jewellery, breaking fixed investments, asking the builder for financial help or availing loans from employers. However, raising debt for repaying another debt is best avoided on a personal level.

Pre-Payment

Pre-payment of a home loan occurs when you as a borrower decide to reduce the borrowed principal by making a lump sum capital repayment. For example, a borrower takes out a housing loan of Rs. 24 lakh (continuing the above example). 2 years later, the borrower has a windfall gain from the stock market of Rs. 5 lakh. Being wise, the borrower contacts the bank and makes a lump sum capital repayment to reduce the outstanding amount of the loan. The very obvious benefits of making a pre-payment are that the borrower will have lesser debt and reduced EMI over the life of the loan.

As a borrower, if you are thinking of making a pre-payment, you should confirm with your bank if there are any applicable fees or charges if you prepay. If there are charges, generally known as a ‘pre-payment charge’, you may want to consider cost vs. benefit in terms of the fees vs. reduction in EMI.

Fixed rate vs. Floating rate

A fixed rate home loan means that if you have availed a housing loan for x%, the rate of interest charged on the loan will be x% for life. On the other hand, if you have a floating rate home loan, the rate of interest may be charged at RBI base rate / other benchmark rates + x%, or according to your bank’s own benchmark rates.

Prima facie, it is difficult to comment on which is better without going through the individual circumstances and the financial position of the borrower, the amount of loan and the repayment structure.

As a borrower, you may want to make an intelligent decision whether to opt for a fixed rate home loan or a floating rate home loan. If the current economic situation is such that lending rates are at their lowest in many years, you may want to consider a fixed rate to avail the benefit of the low rates even when they go up in the future.

So there you have it basic dope on Home Loans in India.

"Home Loans in India, EMI and loan repayment [Lessons 101]", 5 out of 5 based on 1 ratings.
  1. Kamlesh Bhatt says

    Is there any bank / company which can give my client drawing a salary of 22,000 Rupees A HOMELOAN without downpayment?

  2. home loans says

    You can choose from various options of home loan in India which are available with different loan banks by evaluating all property loan offers online.

  3. Dial Abank says

    A fixed rate home loan means that if you have availed a housing loan. Availing Cheapest Rate For Home Loan. Call 9878981166 or Apply Online.
    http://www.dialabank.com/article.cfm/articleid/985

  4. Dial Abank says

    Not all of us are informed and aware of the terms that are used in a home loan or how a home loan will affect our lives in the future. Read more :- http://www.dialabank.com/article.cfm/articleid/1848.

  5. Rahul John says

    You can choose from various options of home loan in India which are available with different loan banks by evaluating all property loan offers online. Home loans rates in India are varying and differ a little from one bank to another depending upon wide range of factors. The services which are offered by Property Loan In India.

    More information visit my website :- http://www.loaninindia.com/.
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  6. Stock Tips Intraday says

    According to RBI if we opt for floating rate , bank will charge no extra cost on prepayment.

    1. Arun Prabhudesai says

      thats a myth…its not true… They charge for pre-payment come what may..

      Arun

      1. Stock Tips Intraday says

        No Arun , this is not a myth. this is a fact.
        please go through the following quote :
        “We have waived the prepayment charges on floating rate loans, ahead of the industry. For fixed rate loans, there is still a prepayment charge,” said Pratip Chaudhuri, chairman, SBI. Bank of India has also stopped charging the prepayment penalty on floating rate retail loans, while Indian Bank has waived these charges for both fixed, as well as floating rate advances. “Our view is our interest rates should be so competitive that the customer should always stay with us,” said T M Bhasin, chairman and managing director, Indian Bank.

      2. Stock Tips Intraday says

        Prepayment penalty on home loans

        Lender Penalty (%)
        State Bank of India Nil
        Punjab National Bank 2
        Bank of Baroda 2
        Bank of India Nil
        Axis Bank Nil
        Union Bank of India 2
        Standard Chartered Bank 2.5
        United Bank of India Nil

        source : banks

        on the recommendation RBI many banks waived off the penalty even on fixed rate also.

  7. harsh gupta says

    only this year gold has given more than 25% return from the start of the year…

  8. harsh gupta says

    we pay 13-16% interest depending on the floating rates on home loans and the maximum saving that we get on banks deposit is 9-10% in the form of fd’s……. and the inflation rate (if we consider only primary articles) is around 12%…. thus you can imagine that every year whatever we save in anks actually depreciates by 3-4% every year and we guys think we made money… on the contrary investments such as in gold gives around 20% return every year and thus our mony actually appreciates by 20-12= 8% and this 8% appreciation is after factoring in inflation and still we ignore gold as an investment … what for ….
    http://newsongold.blogspot.com/ ….. gold is money.

  9. Altaf Rahman says

    A very informative article. However I have a few comments to make.

    Down payments : I recommend that no one takes a loan to finance your down payment (in most cases banks consider this as a personal loan). Not only the EMI for the loan for down payment adding to your housing loan EMI but also the interest on the personal loan is hihger than the housing loan.
    You have to excersize control over the house you can buy with your means. If you do not have money, do not plan to borrow down payment from one bank and housing loan from another. Better to live in his own means. However in extraordinary cases such as when the seller is in great financial stress and selling the home at a bargain and if you delay the deal, you are missing the best bargain of your life, go for it knowing that your income is sufficient to provide for both down payment loan and housing loan EMIs.

    Fixed rate vs floating rates : There is no such thing as fixed rates. Even if banks say it is fixed rate, they will be changing it every quarter based on their internal banking rates. In the long run, both cost you the same.

    Just my two paisa :)

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