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The bitter truth of a Home Loan :
You have been regular in your home loan EMI payments. You
have cancelled your foreign trip. You and your family have not bought the
latest smart phone and laptop to save money.
All this to pay your home loan EMI’s on time. But there is a
nasty surprise…After paying your home loan EMI’s for 2 years your principal
outstanding (home loan principal to be repaid) is almost the same.
You are angry and approach the bank demanding a reply as to
why your home loan principal has not reduced.
You have availed a floating rate home loan of INR 40 Lakhs
paying an interest of 10% for a tenure of 20 years from a reputed bank. Your
home loan EMI is INR 41,288 per month. This is an EMI of INR 4,95,450 a year.
Take a look at the table below (Figures in INR)
Table 1 :
|
Year
|
EMI (Year)
|
EMI Principal (Year)
|
EMI Interest (Year)
|
Principal to be repaid
|
|
1
|
4,95,450
|
58,333
|
4,37,117
|
39,41,667
|
|
2
|
4,95,450
|
65,084
|
4,30,366
|
38,76,583
|
|
3
|
4,95,450
|
72,615
|
4,22,835
|
38,03,968
|
|
4
|
4,95,450
|
81,018
|
4,14,432
|
37,22,950
|
|
5
|
4,95,450
|
90,393
|
4,05,057
|
36,32,557
|
|
6
|
4,95,450
|
1,00,853
|
3,94,597
|
35,31,704
|
|
7
|
4,95,450
|
1,12,524
|
3,82,926
|
34,19,180
|
|
8
|
4,95,450
|
1,25,545
|
3,69,905
|
32,93,635
|
|
9
|
4,95,450
|
1,40,073
|
3,55,377
|
31,53,562
|
|
10
|
4,95,450
|
1,56,282
|
3,39,168
|
29,97,280
|
|
11
|
4,95,450
|
1,74,367
|
3,21,083
|
28,22,913
|
|
12
|
4,95,450
|
1,94,544
|
3,00,906
|
26,28,369
|
|
13
|
4,95,450
|
2,17,057
|
2,78,393
|
24,11,312
|
|
14
|
4,95,450
|
2,42,174
|
2,53,276
|
21,69,138
|
|
15
|
4,95,450
|
2,70,199
|
2,25,251
|
18,98,939
|
|
16
|
4,95,450
|
3,01,466
|
1,93,984
|
15,97,473
|
|
17
|
4,95,450
|
3,36,351
|
1,59,099
|
12,61,122
|
|
18
|
4,95,450
|
3,75,273
|
1,20,177
|
8,85,849
|
|
19
|
4,95,450
|
4,18,699
|
76,751
|
4,67,150
|
|
20
|
4,95,450
|
4,67,150
|
28,300
|
0
|
You have paid an EMI of INR 4,95,450 a year on your home
loan. After 2 years you have paid an EMI of INR 9,90,900.You check
the Principal outstanding and find that you have to repay a home loan principal
of INR 38.76 Lakhs.
Why does this happen?
The answer is the interest on the floating rate home loan.
You pay a high interest of 11% on your home loan. In the initial years of a
home loan most of the repayments you make go towards paying the interest.
|
Year
|
EMI (Year)
|
EMI Principal (Year)
|
EMI Interest (Year)
|
Principal to be repaid
|
|
1
|
4,95,450
|
58,333
|
4,37,117
|
39,41,667
|
|
2
|
4,95,450
|
65,084
|
4,30,366
|
38,76,583
|
You have paid an EMI interest of INR 4,37,117 in the first
year and an EMI interest of INR 4,30,366 in the second year of your home loan.This is a massive INR 8,67,483 as an interest out of INR
9,90,900 you have paid in home loan EMI’s.
The principal you repay is a mere INR 1,23,417 (INR 58,333 + INR 65,084).
Just 12.5% of what you repay goes towards your home loan
principal repayment.You must take extreme care in selecting a floating rate home
loan with a low interest rate. Lower the interest rate more is the amount you
save when you make your repayments on your home loan EMI’s.
Selecting a floating rate home loan with a high rate of
interest means all your money goes in interest repayments.
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