Home Loan Basics ( How to save on home loan and Taxes )

[Vasuki]

Disclaimer - I have complied information and wrote this . Take your CA words for tax & do your own research for more
You can edit if u see anything wrong..
Sorry for grammatical mistakes.




Loan calculator for reference:-

Let's cut short and here is how u can save directly or indirectly after getting the home loan :-
1- Payment of 2-3 extra emi in a year ,when u can afford or get Bonus
2- FLOATING RATE LOANS
when your intrest rate is changed ( yes bank can do it without informing) you need to restructure the loan and increase emi amount by few thousand.
IF repo rate has decreased you can visit bank and get your interest changed to lower % and restructure the loan .
3- prepayment of lakhs or chunk amount in a go ( these directly go to your principal amount by 100% )
Little illustration - suppose if you have

30 lakh loan for 8% at 20 year and your emi is 25093 rs .
You paid 14 emi .
And total intrest payable is 3022368 (30lakh 22 thousand ...)
IF you Pay 1 lakh extra .at 14th month emi ur intrest will reduce by wooping 3 lakh + and now u will only pay 26 lakh in intrest.

why this happened:- it's because you saved 19 year of intrest by paying 1 lakh directly to Principal amount.


Another illustration for point 1 -
Let's suppose you are having struggle and can only save 1 extra Emi per year .
So extra 25k in a year
So now I'm every year 12th month
We will pre pay 25k extra
Now your total 30 lakh intrest comes down to 24 lakh 80 thousand.
You saved 4.4+ lakh in intrest just wait one extra emi pre payment .
What's
More intresting is if u do one extra emi you will complete your 240 month emi home loan in just 204 month.
So u just saved 3 year and 4+ lakh


Illustration 3- if u pay 2 extra emi

You will save wooping 9 lakh and 20 year loan will end in 15 years

But this logic has a flaw - if you pre pay in 1st half of your home loan tenure then u will save more because in first few months & year of any loan
In emi most chunk goes to intrest more and principal less .

Let's see this with example .
If you pre pay 1 lakh in 200th month of 240 month emi
U will just saved 30 k in intrest.

SOONER THE PRE PAYMENT, GREATER THE IMPACT

iN Fixed intrest rate loan - there is penalty on pre payment
but on floating intrest rate there is no penalty on pre payment.


Now we come to 2nd part how to save on tax with home loan
we all know 80c And it's 1.5 lakh benefits

we can claim deduction of principal amount paid in home loan in year

even stamp duty while purchasing home can be claimed under this

BUt let's not get fizzy

you can claim deduction with section 24
on intrest you pay on home loan upto 2 lakh .

Illustration again
Since in first few year u will be paying lot in intrest then u can save 2 lakh claim in section 24 easily

If you have joint owner . Both can claim deduction seperately. Total
3.5+3.5 on taxable income

Some Rbi rules

1- bank will inform you regarding change in intrest rate
2- bank while changing intrest rate should give you options to change from floating intrest rate to fixed interest rate


LETS SAY YOUR INTREST RATE INCREASED .
BANK WILL GIVE TWO CHOICE
1- PAY SAME EMI AND INCREASE TENURE
2- PAY MORE EMI AND SAME TENURE
3 - COMBINATION OF BOTH



Note by @RAMESH BABU N

avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run

NOTE:-
Edits will COME WHEN I HAVE TIME TIME



Thanks to @iAmPm

 

[Vasuki]

It would be better if you rename the title to home loan basics. Else some might think, for 101 degree temperature, the treatment costs a loan on home.

Done

These days, when one has to take loan on home (pawning) to pay hospital bills, you are the only doctor who is taking care of wealth in addition to health.

I m bored now .
Will take short retirement

 

[quino]

fixed interest rate

im yet to see any bank offer this? even if they do, for ex. axis does it at like 14%?

 

[Vasuki]

im yet to see any bank offer this? even if they do, for ex. axis does it at like 14%?

For what ?

 

[quino]

For what ?

home loan ?

 

[Vasuki]

home loan ?

Oh home loan should be negotiated at branch..for best deal
Pre approved always come with higher rates

 

[iAmPm]

This is the only Excel calculator you need to save on the home loan's interest.
Credit: www.basunivesh.com

 

[Vasuki]

This is the only Excel calculator you need to save on the home loan's interest.
Credit: www.basunivesh.com

Thanks I have attached this in main post ..

 

[Hemang]

Is it compulsory to buy home loan insurance from banks nowadays ? Is there any guidelines from IRDAI or RBI for the same ?

 

[snike1792]

Is it compulsory to buy home loan insurance from banks nowadays ? Is there any guidelines from IRDAI or RBI for the same ?

N O O

 

[Hemang]

N O O

Then how to counter bank manager for the same ?

 

[snike1792]

Then how to counter bank manager for the same ?

if you have term insurance then tell the bank official about this. If he doesnt agree then talk to higher official and later RBI. If nothing works out go to a different branch/bank

https://m.economictimes.com/wealth/...-get-it/msmeday_show/64589551.cms?share1=true

 

[Infamous]

great post, looking forward to hear more on this.

 

[Vasuki]

great post, looking forward to hear more on this.

Glad you liked it

 

[Vasuki]

Is it compulsory to buy home loan insurance from banks nowadays ? Is there any guidelines from IRDAI or RBI for the same ?

It's not but unless it's some kida ulip sold to you .it is good . Because it covers all the liabilities.
As one mentioned don't if u have life insurance

if you have term insurance then tell the bank official about this. If he doesnt agree then talk to higher official and later RBI. If nothing works out go to a different branch/bank

https://m.economictimes.com/wealth/...-get-it/msmeday_show/64589551.cms?share1=true

Suppose.you have 2 cr life insurance and 1.5 cr home loan for 25 year.

Going forward 25 year u have net life insurance of 50 lakh ..
Because bank will try to claim that unless they sold the property or auction it in case of emi failure. There are lot to consider

But as said earlier it's a optional . In any loan insurance is sold to safeguard.
But
These branch manager Mfs sell ulips , health insurance+ insurance of loan and what not in same policy and the price per year goes up .

So talk it out .. choose the simple one it won't bother you much .
Talk to BM without hesitation..

If he behaves like blackmailer, call his cluster head

 

[RAMESH BABU N]

Thread with useful info for non-financial guys who are into HLs.

I have a couple of points to add.

After taking HL, try to avoid putting funds in TDRs/FDs. Instead, try to pre-pay HL.

If you have any idle n not-in-use asset (like a 2nd or 3rd car), sell it and pre-pay HL.

Similarly, avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run.

So, one needs to restructure one's habitual saving/investing/valuation methods.

 

[Vasuki]

Similarly, avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run

This seems great angle of thinking will add that

 

[finopapa]

Thread with useful info for non-financial guys who are into HLs.

I have a couple of points to add.

After taking HL, try to avoid putting funds in TDRs/FDs. Instead, try to pre-pay HL.

If you have any idle n not-in-use asset (like a 2nd or 3rd car), sell it and pre-pay HL.

Similarly, avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run.

So, one needs to restructure one's habitual saving/investing/valuation methods.

Can you explain why to avoid SIPs of MFs? If the return is higher than the Home loan interest wouldn't it be better to go for SIPs instead of prepaying. The amount accumulated in SIPs of MFs giving higher return will be much higher than the outstanding home loan.

check this link https://www.etmoney.com/learn/loans/should-you-invest-or-pay-off-your-home-loan/ . The final verdict as per this is

Continuing the home loan and investing extra amount is a better option​

 

[Hemang]

Can you explain why to avoid SIPs of MFs? If the return is higher than the Home loan interest wouldn't it be better to go for SIPs instead of prepaying. The amount accumulated in SIPs of MFs giving higher return will be much higher than the outstanding home loan.

check this link https://www.etmoney.com/learn/loans/should-you-invest-or-pay-off-your-home-loan/ . The final verdict as per this is

Continuing the home loan and investing extra amount is a better option​

First of all life without debt is more necessary. Secondly we need to calculate interest saved for whole loan tenure period for the amount we pre pay in home loan.
That needs to be compared to MF return.

 

[RAMESH BABU N]

Can you explain why to avoid SIPs of MFs? If the return is higher than the Home loan interest wouldn't it be better to go for SIPs instead of prepaying. The amount accumulated in SIPs of MFs giving higher return will be much higher than the outstanding home loan.

check this link https://www.etmoney.com/learn/loans/should-you-invest-or-pay-off-your-home-loan/ . The final verdict as per this is

Continuing the home loan and investing extra amount is a better option​

This will hold good in a growing stock market valuation. During crashes, MFs lose heavily.

I have seen more than a handul of stock market crashes. I have been very active investor from my 18th year onwards (since 1978-79 onwards). Moved out of MFs completely by 22nd year. Since, then direct investment gave much better returns than going thru MF route.

Luckily, such market crashes had almost no downside impacts on me/us.

I remember a lot of top class investors, so-called experts have burned their fingers n everything else. Reliance crashed to 50s. Probably, you are not aware. Similarly, you may have not seen Harshad Mehta scam.

If you still feel that MFs give better returns, you choose what you think is better for you.
But, my experiences - as an investor, as a trader n as a banker - have taught me to avoid MFs - if you have a HL.

You may or may not agree - based on your shorter experiences (as compared to mine).

 

[finopapa]

This will hold good in a growing stock market valuation. During crashes, MFs lose heavily.

I have seen more than a handul of stock market crashes. I have been very active investor from my 18th year onwards (since 1978-79 onwards). Moved out of MFs completely by 22nd year. Since, then direct investment gave much better returns than going thru MF route.

Luckily, such market crashes had almost no downside impacts on me/us.

I remember a lot of top class investors, so-called experts have burned their fingers n everything else. Reliance crashed to 50s. Probably, you are not aware. Similarly, you may have not seen Harshad Mehta scam.

If you still feel that MFs give better returns, you choose what you think is better for you.
But, my experiences - as an investor, as a trader n as a banker - have taught me to avoid MFs - if you have a HL.

You may or may not agree - based on your shorter experiences (as compared to mine).

In my opinion taking the SIP route and for a very long term, the MF will give better returns than the HL interest.
There is no doubt that direct investment will better returns than MF but the question here is to get better returns than the HL interest.

Even with Stock Market crashes the return on MF through SIP will always be higher in the long run.