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Home Loans, a loan option availed by different options that help an individual achieve one of his biggest dreams, owning a house. However, the initial excitement of purchasing a home dies down as soon the individual’s attention is diverted to the burden of the monthly repayment or loan EMI.

Home loans are tricky, but rarely any person today is there who does not take a home loan when they plan to buy a house. Taking home loans is easy but getting rid of the loan becomes hefty.

Why it is so difficult to get rid of home loans…………..

A home loan taken at 8% per annum for a 20-year tenure is likely to have an aggregate interest cost of slightly over 50% of the amount you repay if you hold on to the loan for the entire tenure.

Currently, the interest rate offered on home loans is between 6.75% to 7.15% a year by different banks. However, if you have an older home loan the rate remains 8% a year.

The Number Game In Home Loans……

You might not be knowing this fact but most people end up repaying their home loan amount equal to double what they had borrowed! See how?

Say you take a home loan of Rs 1 crore at 8% interest a year for a period of 20 years, the EMI works out to roughly Rs 83,640 a month. This, in 20 years, translates to an aggregate payment of just over Rs 2 crore, which simply means double of what you had borrowed!

However, this can be avoided, in a situation when you will be able to repay the loan amount before the entire tenure completes. However, it is advised not to be so quick, but to consider other things also before you end up deciding for pre-payment of home loan.

The Strategy For The Remaining Tenure………

We said earlier that home loans are tricky. This is so because they are structured in a way more beneficial to the bank rather than for the borrower. In the initial years of its repayment that is in the first 10-11 years, the EMI amount remains constant, which is comparatively much lower as compared to the second half of the tenure.

Thus, financial experts advise, if you do not want to repay the double amount, then try repaying your loan amount in the first 5-7 years as you will save a lot.

However, if you decide to repay the loan amount in the latter half of the tenure, then it’s simply not worthy. This is because you would have already paid around 70% of the interest cost by year 10-11, initial years of repayment.

What to do in the remaining EMI tenure after I prepay my loan amount in the first initial years of repayment……….

Simply invest! If your home loan interest rate is low, instead of focusing on late pre-payment, use that money to invest for the same number of years as remaining in your EMI.

Pick up an investment option that will help you gain returns with an interest rate more than charged on the home loan. Here no other option that Equity mutual funds can be considered as best.

Equity mutual funds can potentially deliver inflation plus returns higher than your home loan rate over a period of 9-10 years. So do not think, just invest in equity mutual funds.

Saving To Repay Or Is It A Lumpsum………..

Well, if you are fed up with the heavy loan amount and are focusing on saving more by cutting corners on other expenses so that you can prepay the loan amount then it is okay.

However, if you have a lump-sum amount, or you got a good bonus, then you have two situations:

• In case your daily cash inflow is facing a problem due to cutting on expenses, then use this lump-sum amount to repay the loan amount.
• In case you are comfortable around daily cash inflow, then think of investing this money for a long period matching your remaining tenure. This can help you take advantage of the higher return from market-linked investments.  

Keep reading our article and stay updated with the latest news about Mutual Funds!

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).