Things about home loan that nobody tells
Almost every salaried person would have some experience where someone tells about home loan and how it can save income taxes and all. Our inbox and mails are bombarded with messages that how easy it is to avail one.
Though it can be beneficial for people who really want to have their dream home. Many others only fall victim into buying a home on loan by the sales pitch of either a real estate agent or some financial institution providing the home loans. But, it’s another topic whether we should really buy a home.
For now, let us discuss what are the things which banks never tell us about home loans.
Income tax benefits Vs Interest on Home loan
Many people argue that if you are in 20% or higher tax bracket then a home loan will help you save income tax. So, let’s break that bubble, shall we?
One can avail tax benefit on only interest paid on the home loan. That makes the money saved on income tax amount to peanuts compared to what is paid on loan interest.
Let’s take an example of Madhu. So, Madhu wants to take a loan of ₹ 50L and her monthly salary is ₹ 80K. Let’s take the interest rate of 7.5% (which may vary) and use an online calculator. We can see that Madhu will be able to repay the loan in 20 years if she pays ₹ 40K EMI per month.
So, after 20 years Madhu would have paid a sum of ₹ 97L i.e. a whopping ₹47L money as interest!
Now, there is one more interesting thing. In initial years, most of the EMI goes to interest and not the principal amount. That means, that overall Madhu needs to pay more interest as EMI majorly depends on the principal.
Also, in initial years of her career, she might be only in 20% tax bracket. That means she will only save 20% of the tax paid. Whereas her career makes progress over time and she will get into 30% bracket. But, she will not avail much tax benefits as then her EMI is paying towards the principal amount. (remember, the tax benefit is only on loan interest)
Even if we do a crude analysis here and assume that she will get 20% tax benefit on overall interest, she will eventually save ₹ 9L on tax and will pay ₹ 38L as interest amount. The money she will never see again!
Pre-closure of loan account
Once people start paying monthly EMI they get the actual feel what it takes to give away half of the salary in EMIs and that too when the total loan amount is not reducing significantly. Many think to pay more than their EMI to pre-close their loan account.
But unlike education loans, home loan comes with pre-closure charges. That means let’s say your bank has 5% pre-closure charges. Then, 5% of the extra money you paid will go as an additional charge to the bank and will not contribute anything to your loan.
Changes in interest rates do not automatically reflect in EMI
This points might interest those who already have a home loan and currently paying EMIs.
In many cases, home loan interest rates come down such as when RBI cuts repo rate, for example during COVID19 pandemic in May 2020. People think that this change of rate will be automatically applied to their loan if theirs is a ‘floating’ kind.
(In floating home loan, the interest rate vary depending upon the market fluctuations)
But, it is found that many a time, these lowered interest rates do not get applied automatically. Banks wait for the lenders to submit an application for getting the lowered rates. And, you get the benefit only after you ask for it. (source: this)
So, if you already have a loan, make sure you contact your relationship manager to ask for it.
Have another useful tip for home loans? Do comment and let us know.
Originally published at https://blog.campizo.in on October 12, 2020.
