The 'smartest' home loan EMI solution

Home loan repayments are increasingly becoming a matter of concern. Realty rates are on the expectational curve (moving up). Home loan interest rates are rising by the day and banks are coming up with various clauses (age-based, locale-based) to recover their dues.

You need to make smart decisions and plan your payments accordingly. At the same time, you need to ensure that your peace of mind is entirely in your hands.

Let's assume you have taken a home loan for Rs 10 lakhs at 11 per cent floating rate of interest for the tenure of 180 months.

In the table below, assuming your equated monthly installment is Rs 11,366, you will be paying Rs 20,45,880 at the end of 15 years.

However, because of the income tax benefit of Rs 6,02,508, your effective loan amount at the end of the loan term (15 years or 180 months) will be Rs 14,43,372.

On the other hand, if you go for the 'smart home loan scheme' offered by various banks, the effective loan amount paid for the same amount and for the same tenure will be Rs 12,20,296.

This way, you can save a net Rs 2,23,076 (Rs 14,43,372 less Rs 12,20,296). The table below shows how this is possible:

Isn't this method of paying back your loan a clear winner then? Yes, unless you read further.

Now let's look at a method where you open a recurring deposit account and deposit the same Rs 3,000 into that account. Most of the banks offer 8.75-9 per cent returns on recurring deposits. For simplicity's sake, let's assume your RD account fetches you a return of 9 per cent per annum.

Now, at the end of the 21st month of your EMI payment, you would have paid Rs 45,000 as the principal component of the loan. At the same time, your RD account will have accumulated Rs 63,000 (Rs 3,000 * 21 months). Withdraw Rs 55,000 from this RD and use it to make a prepayment.

This will not only help you avail of the maximum tax benefit (Rs 1,00,000, that is Rs 45,000 + Rs 55,000); it will also help reduce your loan amount by Rs 1,00,000.

Similarly, at the end of the 33rd month, you would have paid another Rs 55,000 through your EMI payments. And you would require another 45,000 to avail of the Rs 1,00,000 tax benefit limit.

Again, dip into your RD account. Before you forget, let's remember that, in the interim, you would have deposited Rs 36,000 (Rs 3,000 * 12) into your RD account that would have given you 9 per cent returns per annum.

By the end of 33rd month, you would have repaid another Rs 1,00,000 of your Rs 10,00,000 home loan.

This method will also help you prepay your Rs 10,00,000 home loan by the 112th month. The advantage is that you would have paid Rs 12,01,960; that is an additional saving of Rs 19,000 than what you would have saved under Scenario II.

It is because of the Rs 19,000 extra that you save as compared to scenario II that you can call this the best option for you. Of course, you will have to make some efforts in opening an RD account.

Rs 19,000 saved over a period of 112 months may not be a big deal but then if you are a home loan borrower in today's time then every penny saved is indeed a big amount. 

The other advantage, of course, is the tax benefit you have got with this method. Against a tax benefit of Rs  3,80,279 in scenario II, here you get a tax benefit of Rs 4,47,898. Not a bad deal.

By doing this, the borrower can optimise his effective loan cost.