Recently, a news has become a topic of discussion on social media that an IT engineer is driving Rapido part-time to pay his house installment (EMI). This person is driving Rapido because he does not have a job. But many people may feel that they can easily repay the home loan by doing some extra work. But if you have a job, you can settle your 20 year loan in 10 years without doing anything extra. Let us understand this completely with a story and calculations.
30 years old, a job, a small flat in the city, and also the responsibility of the family. On the surface everything seemed fine, but the loan of Rs 50 lakh to buy a small flat does not allow that person to sleep peacefully. He has taken a loan of Rs 50 lakh for 20 years, but he will have to pay the monthly installment (EMI) of about Rs 40,000 for the next 20 years. If everything goes smoothly, his loan will be completed at the age of 50 and the house will also become his. But by the age of 50, the hair would have turned gray and many dreams would have died while repaying the loan.
People say that home loan is a good thing, it gives tax exemption, one can own a house. All this is true, but what is its cost? Twenty years of debt, which eats up half of your life!! And do you know, in 20 years you pay approximately Rs 1 crore 2 lakh to the bank instead of Rs 50 lakh. That means you have to pay Rs 52 lakh only as interest. As if you have worked for the bank and not for yourself. We are not scaring you here, but showing a mirror which tells the truth.
Now you may ask, is there any way, any way, by which this burden of 20 years can be eliminated in 10 years? Is it possible that you can avoid paying interest worth lakhs of rupees to the bank, that too without feeling much burden? So you will be happy to know that there is such a method. That method is not magic, but a game of calculation and a little intelligence. Some small financial tricks can make a big difference.
Initial calculations and burden
First of all, we have to understand what our initial burden is. We have assumed that the loan is of Rs 50 lakh. The loan tenure is 20 years (240 months). The interest rate is 9% per annum.
If we calculate it directly, your monthly installment (EMI) comes to approximately Rs 44,986. In 20 years you pay approximately Rs 57,96,640 as interest. That is, for a loan of Rs 50 lakh, you pay approximately Rs 1,07,96,640 to the bank.
Now we want this 20 year period to be reduced to 10 years. The matter should be resolved in just 120 months. If you had taken a loan for 10 years directly, your monthly installment would have been around Rs 63,338. That means every month you would have to pay about Rs 18,352 more. But this would have become a huge burden. We don’t have to do this. We have to adopt some methods so that the burden does not increase and the loan also ends soon.
Method 1: Higher EMI from Start
This is the simplest and most effective method. You know that in the initial years of the loan, most of your installment goes towards interest, and very little of the principal amount is deducted. If you increase your monthly installment a little from the beginning, you directly reduce the principal amount, and the interest cycle becomes shorter.
Suppose your salary is new and you cannot make a big change. You simply increase your monthly installment by 5 percent to Rs 44,986. 5% more installment means Rs 47,235.
You won’t believe what will happen if you pay Rs 2,249 more every month. Instead of the earlier 20 years (240 months), your loan will now expire in approximately 17 years and 4 months (208 months). You saved approximately 2 years and 8 months of time and interest of approximately Rs 10 lakh.
Second method: One Extra EMI Per Year
Now this method is the turning point of the story. This is the easiest, least cumbersome and most wonderful way. You pay your normal installment (Rs 44,986) for the entire year, and then pay an additional EMI at the end of the year. You may have received a bonus, increment or incentive. Pay one monthly installment before spending this money anywhere else.
You paid this one installment as prepayment. This entire money will be deducted directly from your principal. This will shorten the tenure of your loan and the interest burden will be greatly reduced. You will be shocked to see its calculations.
If you pay just one additional installment of Rs 44,986 every year, the 20 year loan tenure will be reduced to approximately 14 years and 8 months (176 months). You have saved time of 5 years and 4 months and also interest of about Rs 19 lakh.
Third method: Increasing EMI with Salary Hike
This is a strategy that combines your emotions and facts. When you get a job, you get an increment every year. Suppose your salary increases by 10 percent every year.
When your salary increases, you also increase your lifestyle accordingly. New gadgets, higher travel expenses. But if you consider repaying the loan early as your priority, then you do not have to increase these expenses in proportion to the increase in salary. All you have to do is add 50 percent of the increment in your salary every year, i.e. half of the increment, to your monthly installment.
Suppose your monthly installment for the first year is Rs 44,986. In the second year you got an increment of 10 percent. Your salary increased by approximately Rs 4,500 per month. You increase half of this Rs 4,500 i.e. Rs 2,250 in your installment. Your new installment in the second year will be Rs 47,236. Next year the increment was again imposed and the installment increased again. This method also does not weigh heavily on your pocket, because you are only spending the money that you are getting extra.
Now see its calculation also-
If you assume 10% increment every year and keep adding 50% of it in the installment, then your loan tenure of 20 years will be reduced to approximately 10 years and 2 months.
Fourth method: Lumpsum prepayment in the fifth year
Let us assume that you could not adopt any of the methods given above, but you continued your investment. You did SIP (Systematic Investment Plan) somewhere, or bought and sold a plot. By the end of the fifth year, your principal balance will be around Rs 47 lakh. Meaning your loan would have been reduced by only Rs 3 lakh out of Rs 50 lakh.
If at this time you get a lumpsum amount of Rs 10 lakh from somewhere, and you pre-pay it directly into the loan, then see what happens: Your remaining principal amount will reduce from Rs 47 lakh to Rs 37 lakh. Your monthly installment will remain the same at Rs 44,986, but the tenure will be reduced from 15 years to approximately 9 years.
How much benefit will there be if it is settled in 10 years?
If you finish your 20 year loan in just 10 years, you will benefit a lot. You pay only Rs 28 lakh interest instead of Rs 57 lakh. You have saved Rs 29 lakh. The biggest thing is that you become debt-free at the age of 40. Now the house is yours and the money which was going in installments, will now be left in your pocket. With that money you can fulfill your hobbies and dreams, because right now you are not 50 years old but only 40 years old.
