Deciding to buy a home is an overwhelming experience; and while it may be wiser to buy a residential property with one’s savings, at times it might make more sense to avail a home loan. “Let’s say you are taking a Rs 50 lakh loan over a 20 year period. With the prevailing interest rate at 7.4 per cent, your interest outflow on that Rs 50 lakh over 20 years is an incremental Rs 46 lakh. While the wiser thing is buying a home without a loan, practically one needs to have to take a loan to buy a long term asset,” said Adhil Shetty, CEO, Bankbazaar.com. He added that the sum total of the EMIs on home loan should not be more than 40 per cent of your disposable income under a prudent financial plan.
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While that’s established, there are ways to decrease the interest amount one pays over the loan tenure?
Prepayment of the loan is among the best things to do when trying to reduce the interest burden over the loan tenure. Whenever one makes a prepayment towards their loan, it reduces the outstanding principal amount and the next month’s interest gets calculated only on the remaining principal amount. Adhil Shetty talked about various ways one can finish their loan much quicker, with an example of a 20-year loan.
“Let’s take a scenario where a borrower has secured a Rs 50 lakh worth of loan for 20 years at the interest rate of 7.4 per cent. The first way is to prepay one extra EMI per year and your loan will finish in 17 years. Second, every year as your salary goes up, voluntarily increase your EMI by 10 per cent and your 20 year loan will be paid off in 10 years. Third, every year prepay 5 per cent of your outstanding home loan and your tenure will go to 10 years. These are the three simple scenarios and as long as you are on a free floating rate home loan, prepayments are an easy option and do not incur extra charges,” he said.
Tax benefits on home loan
Neeraj Agarwala, Partner, Nangia Andersen India, described, “If you are occupying your own house, upto Rs 2 lakh is allowed as a deduction in the interest that you pay, and that helps you to reduce your tax cost. Further, there is a tax deduction on the principal amount under Section 80C. These are the two tax exemptions and both of them together make a very attractive scheme for an employee.
Deductions on principal amount is available for Rs 1.5 lakh, and on the interest amount for another Rs 2 lakh; and this is true even when you have a second home loan. Further, 80C deduction also includes investments like PPF, ELSS, etc, Neeraj Agarwala said. According to earlier income tax laws, if you owned two houses, you could claim only one as self-occupied and treat the second house as deemed to be let-out, even if it was vacant or occupied by family. The rule has now changed to allow people to claim the benefits of 2 self-occupied houses.