Anil Sharma

Understanding home loans in India

home-loan-indiaIt’s taken me a few years to understand how home loans work in India.  This post should help anyone who’s got a home loan from a bank in India or is planning to take one. The most important tool you will need to understand the entire subject of home loans- an interactive EMI calculator – is available at the bottom on this post (requires flash). If you enter the amount of home loan you’re looking at, the interest rates being offered etc., you can figure out the EMI -but more important, you can visually see the total amount you would pay for the entire loan. That’s when you get a shock.  

For the purpose of this post, lets use this data throughout:

It’s impossible to buy a decent apartment in Delhi NCR for less than Rs. 75 Lacs today so you collect 25 Lakhs of your own funds and take a loan of 50 Lakhs at an interest rate of 11% for 20 years. Your EMI would be Rs. 51,609 per month. There are no Pre-Payment charges in the bank loan.

What would the above apartment finally cost you?

The loan would result into a payout of Rs. 1,23,86,160 over the 20 years. The interest on 25 Lakhs for 20 years at a rate of 9% compounded annually is Rs. 1,15,11,026.92. So the total cost of your apartment over 20 years will be Rs. 2,63,97,186.92. That’s an average monthly cost of Rs 1,09,988! Wouldn’t you prefer staying in a rented apartment? I won’t get into the Buy vs. Rent argument here – but at current market prices and rate of interest, rent definitely seems a winner.

Assuming you still go ahead with the home loan – or already have one – what are your best choices? The EMI calculator below is a very powerful tool in taking a few decisions:

a. For the example above, if you can negotiate or transfer your personal loans to a bank that reduces the rate by 1% but keep paying the same EMI – you could reduce the loan tenure to 16.5 years and the total payout to bank from 1,23,86,160 to 1,02,27,690! That’s a saving of 21.5 lakhs!

b.  After a year of taking the loan, if you can pre-pay Rs. 2 lakhs of the principal amount, the total payout reduces to bank reduces to Rs. 1,11,81,713. That’s a saving of Rs. 12 Lakhs. 

By trying out a few such combinations in the tool, you might just come out with an option that really works for you.  With the RBI removing pre-payment charges for home loans, you are now free to negotiate and transfer the loan from one bank to another.  The main thing to understand about home loans is that every % of reduced interest and pre-payment at early stage of the loans has a significant impact on the total payout. 

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