How To Buy A Home And Repay EMI Quickly

Nutan Gaba -- Chief Financial Officer, Home First Finance -- lists the incentives for salaried women and how they can save money by repaying home loan quickly.
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Owning a house is considered to be a big step in the journey towards stability and financial independence. So it is no surprise that more and more women are becoming proud homeowners.

As per a consumer survey by Anarock, 62 per cent of women in India say they are interested in real estate; of which 82 per cent want to buy a property for their own use. Trends also suggest that despite lower numbers, women borrowers are regular and responsible regarding their financial obligations.

As an encouragement for this expanding segment of successful and reliable customers, lenders are coming up with special offerings. Women can make use of the following incentives to make their home purchase journey easier:

1. Higher Loan Eligibility: Women are eligible for a better LTV (loan to value) if they register as co-applicants along with their spouse or another family member, leading to a lower down payment required and better flexibility in choosing a property.
2. Lower Interest Rates: With trends and studies suggesting that women pay their financial commitments regularly, lenders feel comfortable in offering them loans at subsidised rates.
3. Income Tax Benefits: Women can claim up to Rs 1.5 lakh as Income Tax Benefit on Principal Paid under Section 80C and Rs 2 Lakh on interest paid. Married couples can both claim tax deduction on payment of loan and interest payment on the same joint home loan.

Congratulations! With the help of these incentives, you can buy the home of your choice for a reasonable monthly installment. This is the best and safest route to home ownership. However, if you are looking at those terms and conditions in your agreement and thinking about how to repay your loan at the earliest, let me help you with some ways to getting debt free soon:

1. Always choose a shorter tenure: Ever heard the quote that Time is Money? Well in case of loans it definitely is. A longer tenure ensures that you pay more interest to your lender. A smaller tenure despite having an uncomfortable EMI amount in the beginning gets easier to pay over time as your job experience and earning improves.
2. Always make a big down payment: A tip with dual benefit, while a bigger down payment reduces the amount of loan you actually need from your lender, it also gives confidence to your lender about your finances which could translate to a lower interest rate.
3. Always make prepayments no matter how small: Every EMI you pay can be broken down into two smaller parts: the interest portion and the principal portion. When you start your loan repayment journey most of your EMI money actually goes into paying the interest charged and very less towards actually paying back the principal borrowed. Gradually over time, the balance shifts the other way and you actually pay back more of your principal. However this means that the longer you pay EMIs the more amount you are likely to pay in interest.

How to save lakhs while repaying a small amount extra every month

A key to saving your loan payments in that case could be prepayments. Prepayment is a small portion you pay over and above your EMI. Since you have paid your monthly EMI, this amount is completely cut from your principal amount due leading to lesser principal left to repay.

Some lenders also provide the facility of auto prepay -- an auto debit service -- which once set monthly, pays back a determined amount as small as Rs 1,000 from your account towards paying back your loan. This tiny amount of money could in effect help you save lakh. Allow me to elaborate with an example:

Pooja takes a loan of Rs 10,00,000 at 10 per cent rate of 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 Pooja as Rs 9,650. As she pays her first EMI of a total of Rs 9,650, Rs 1,317 of it goes towards paying off the total principal amount due -- Rs 10,00,000, and the remaining Rs 8,333 goes as interest paid.

As the months go by, though the EMI remains the same, within it the interest component decreases as you repay more and more of your principal.

For Pooja in our example, in the next months the amounts of Rs 1,317 and Rs 8,333 will become Rs 1,328 and Rs 8,322... Rs 1,339 and Rs 8,311 and Rs 1,350 and Rs 8,300 and so on till the end of 240 months (20 years).

However, if she chooses to make a prepayment of Rs 1,000 every month, she will be able to close her loan in 184 months, saving herself 56 months of EMIs and Rs 3,58,494 in interest payments.

Fully equipped with the knowledge of these incentives and how to extract the most value from them, you too can become a proud homeowner now and take that big step towards financial independence.

Coupled with the superpower of prepayments, this can help you close the loan early to save money and celebrate the joys of home ownership.