The Saying goes; “PEACE – that is the other name for Home”.

If I am able to pay 5 digits of rent in a month for any big house, villa or banglow with superb natural ambiance, but still I am not satisfied until I have my own house. Having own house whether big or small, it’s a dream of everyone today. But looking at today’s spiraling real estate price it is very difficult to sell out lumpsum amount for buying a house, thus we look for home loan for buying our “Dream Home”,

but the problems arises when the lender throws a lot of options on us and we are not in position to counter of those. Few of them we will be discussing in this article.

We all know there are 2 kinds of rates are available in the home loan market.

  1. Fixed Rate
  2. Floating Rate

Because of huge competition in home loan market home loan providers give options to the borrowers that they can opt for floating rate but for few initial years they can fix their interest rates (say 3 years or max of 5 years).

For example: Someone who is taking a loan with fixed rate of interest, they cannot change the rate in their predefined tenure, but if someone wants to take advantage of lower interest rate in market and anticipating that rate will go higher for few years and then will go down then this option will be very good. Borrower can fix their rates for first 3 to 5 years on prevailing rates and after 3 to 5 years the rates will automatically switch to floating rate.

We have to pay the EMIs as a loan repayment on monthly basis to banks regularly and in EMIs also there are options which are available in market that really impact on our pocket. So we have to do a detailed homework before signing a particular EMI option.

Let us have a look into the available options.

EMI: This is a conventional model of repayment to any loans. Here you repay the loan in Equated Monthly Installments (EMIs) comprising principal and interest. Repayment by way of EMI commences from the month following the month in which you have taken full disbursement.

Pre-EMI: For under construction properties, the sanctioned loan amount is disbursed to the builder as and when the stipulated work is completed as per the agreement. For this periodic partial disbursement, the interest that is paid, till the completion of the property is known as Pre-EMI.

Tranche Based EMI: To help customers save Pre-EMI interest, few of loan providers offer special facility of Tranche Based EMI. For under construction properties borrower can choose the installments they wish to pay, till the time the property is ready for possession. Anything paid over and above the interest by the customer goes towards Principal repayment.

Other options which lender can offer are – Step up EMI and Step down EMI;

Step up EMI: Looking at future increments in income of the borrowers over a period of time the lenders offer a Step up EMI option. Effectively, in such a facility, the borrower initially pays lesser EMI and gradually over time with increase in income, the EMI too increases. The change in EMI would be done twice during the entire loan tenure.

Step down EMI: This is another unique option of repayment given by lenders where the EMIs are structured in such a way that the first year it is at its highest, and gradually reduces each year.

Tax implication on EMIs: (Most important to note)

Pre-EMIs:

The brighter side to all the extra interest that you pay through a Pre-EMI is the tax deduction under Section 24 with max limit Rs. 1,50,000. All interest paid as pre-EMI prior to completion of construction, is a deductible in 5 equal installments, in the five subsequent years, beginning from the year in which the construction is completed.

Say for example, you have paid a total of Rs.2,50,000, in the pre construction period as Pre EMI. Then Rs.50,000 (i.e.2,50,000/5) would be the tax deductible in each year for the next 5 years.

There would be no tax benefit available on any principal repayment, if at all done, in the pre-completion phase. Principal repayments on a loan made in the years after the construction of the property eligible for deduction up to a limit of Rs. 1 lakh per annum.

“Also while claiming Pre-EMI tax benefits the total interest component (i.e. the current year post-possession interest component + the previous year’s 20% or 1/5th Pre-EMI interest component) cannot exceed the Rs. 1,50,000.”

Other than Pre- EMIs:

After taking possession of house you can claim Rs. 1,00,000 (Max Limit) under section 80C and 1,50,000 (Max Limit) under section 24B for claiming interest paid.

Factors that determine your EMI

The EMI of a home loan is determined by the following four factors:

The size of loan that borrowed from lender. The rate of interest at which the loan will be chargeable, thus the higher the interest rate, the higher the EMI. Time duration for repayment; in a long tenure repayment option you pay lower EMI, but do remember the interest accumulation will be very high compare to a lower tenure option. The calculation of EMI differs from borrower to borrower even though the rates of interest are same. This is basically the method that they apply while calculating the same; such as annual, monthly or daily reducing methods.

Hope this article makes you to re think if you are going for a home loan or look back into pattern of current EMI.

Please share your thoughts or ask any query.

Home Loan – “Look before you Leap”

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