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

 

[RGARG123]

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).

Even with stock market crashes and if we look a small tenure of 10 years only (as compared to 20 year home loan tenure), returns of stock market/MF's has outpaced home loan interest by big margin. No matter which 10 year block you choose, returns of stock market are higher. Reliance was 50 probably during early part of this century, but in any block of 10 yrs it has never given negative return but it is multiple times. All market crashes have recovered as swiftly as possible.

 

[finopapa]

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.

Obviously the interest saved for the whole tenure period needs to be compared. The MF also needs to continue for the entire loan tenure for comparison.

I agree with the psychological need for having debt free life. But don't we use credit cards and get it's benefits. Yes, for those who are not financially responsible debt is a problem. But for those who are having basic financial knowledge, debt can be leveraged to get higher returns

 

[RAMESH BABU N]

That's what I always say - you choose based on your experience and your perceptions. On the current scenario n into the future.

I am speaking strictly based on my own experiences - over the last 45 years - and by observing my own circle of friends n colleagues. I NEVER go by what novices write on social media - with limited or even no experience - but are ready to guide - thanks to the Google knowledge.

I have taken HLs 2 times. VLs 4 times. I have investments in all types of assets.

 

[finopapa]

That's what I always say - you choose based on your experience and your perceptions. On the current scenario n into the future.

I am speaking strictly based on my own experiences - over the last 45 years - and by observing my own circle of friends n colleagues. I NEVER go by what novices write on social media - with limited or even no experience - but are ready to guide - thanks to the Google knowledge.

I have taken HLs 2 times. VLs 4 times. I have investments in all types of assets.

Sir. Experience needs to be backed up with data.
You are right sir. You should never go by what novices write on social media whether based on Google knowledge or their experience (limited or otherwise)

 

[shivamk]

This seems great angle of thinking will add that

Experience speaks for itself bro. It's great to have a veteran like @RAMESH BABU N here.

 

[CyberPsych]

Payment of 2-3 extra emi in a year ,when u can afford or get Bonus

If I bought a mobile in 6 months EMI with credit card in Amazon/Flipkart, how can I pay before hand? Pay twice to make credit card go into negative balance? After statment, it will be only equalled right, how it will save?
Or this doesn't work for such EMIs?

 

[Vasuki]

Even with stock market crashes and if we look a small tenure of 10 years only (as compared to 20 year home loan tenure), returns of stock market/MF's has outpaced home loan interest by big margin. No matter which 10 year block you choose, returns of stock market are higher. Reliance was 50 probably during early part of this century, but in any block of 10 yrs it has never given negative return but it is multiple times. All market crashes have recovered as swiftly as possible.

The amount of intrest saved is far far more than the money earned from mf .
If u pay 2 lakh u save approx 2 lakh upfront.
So yeah value proposition is different

Obviously the interest saved for the whole tenure period needs to be compared. The MF also needs to continue for the entire loan tenure for comparison.

I agree with the psychological need for having debt free life. But don't we use credit cards and get it's benefits. Yes, for those who are not financially responsible debt is a problem. But for those who are having basic financial knowledge, debt can be leveraged to get higher returns

When u pay upfront u pay directly the sum .
So u save intrest+ tenure
& When u reschedule u reduce both amount & tenure ..

 

[Vasuki]

If I bought a mobile in 6 months EMI with credit card in Amazon/Flipkart, how can I pay before hand? Pay twice to make credit card go into negative balance? After statment, it will be only equalled right, how it will save?
Or this doesn't work for such EMIs?

No u have to raise request to cancel the emi .
Personal loan , consumer loan has 2.5% of extra charges for pre payment.

 

[RAMESH BABU N]

If I bought a mobile in 6 months EMI with credit card in Amazon/Flipkart, how can I pay before hand? Pay twice to make credit card go into negative balance? After statment, it will be only equalled right, how it will save?
Or this doesn't work for such EMIs?

Here, in this thread, we are discussing HLs. Housing Loans n EMIs n Repayments.

 

[ismail]

the topic (of prepayment) covered is good, but dont go by bigger numbers of saved money after 30yrs by prepaying now. As that big amount after 30 yrs will be pennies of that period. i say just see home loan interest now and decide to continue investing if u r going to make atleast 3-4% more than Home loan interest

 

[NewUser]

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 .

Interest rates change when RBI changes the repo rate. If the repo rates increase, all banks increase the interest rate. But if it decreases, private banks like HDFC won't decrease the interest rates automatically. You have to pay a small fee to decrease the interest rate. The latter is not true for government banks though. Govt. banks will decrease the interest rate automatically with the fall in repo rate.

3- prepayment of lakhs or chunk amount in a go ( these directly go to your principal amount by 100% )

Adding to this. If you prepay any amount you can(need not be lakhs) at the beginning of the home loan, it'd have a huge impact down the line.
However, private banks restrict the prepayment amount. For instance, earlier(about a year ago) HDFC had a rule that the prepayment amount should be at least 3 times the EMI amount, and there was a lot of hassle to make the pre-payment. This is not the case with govt banks though. In govt banks, you can GPay the amount, and it'll be reflected in your home loan instantly.

 

[Vasuki]

Interest rates change when RBI changes the repo rate. If the repo rates increase, all banks increase the interest rate. But if it decreases, private banks like HDFC won't decrease the interest rates automatically. You have to pay a small fee to decrease the interest rate. The latter is not true for government banks though. Govt. banks will decrease the interest rate automatically with the fall in repo rate.


Adding to this. If you prepay any amount you can(need not be lakhs) at the beginning of the home loan, it'd have a huge impact down the line.
However, private banks restrict the prepayment amount. For instance, earlier(about a year ago) HDFC had a rule that the prepayment amount should be at least 3 times the EMI amount, and there was a lot of hassle to make the pre-payment. This is not the case with govt banks though. In govt banks, you can GPay the amount, and it'll be reflected in your home loan instantly.

True hdfc is fugging hassle
Because of merger the situation improved still it's shit
Compared to sbi or even canara

 

[NewUser]

True hdfc is fugging hassle
Because of merger the situation improved still it's shit
Compared to sbi or even canara

Always has been. For instance, to prepay, the user(who took the loan) needs to write a cheque and submit to the branch with an application, or mail the official email Id that s/he needs to prepay, Post that the official will generate a one-time link via which can be used for the pre-payment. Usually the users go the second route since it's online. Little do they realize they need to mail HDFC many times before getting a response for the one-time link.

HDFC and private banks have good service before processing the loan. They even give 90-10 splits and the builder's agents have the second-highest commission from HDFC[highest commissions are given by NBFCs]. But the after-sales is terrible. Govt banks have this reverse. It's always suggested to go with SBI, though they give 80-20 split(75-25 for properties over 1 Cr). This is because they do the due diligence required to pass the loan. If they smell something slightly fishy, they'll reject the loan, and you'd know the property you're buying may not be safe.

 

[shivamk]

Hi folks need some advice.

1. Which bank(s) would be good to take HL? PSUs or Private banks. Which ones offer the least interest rate?

2. Should I become a joint owner in the loan with my fatheror should I plan to save taxes using HRA/rent way? If I become a joint owner initially is there any chance to use rent way to save taxes later.

My CIBIL: 770+ (only CCs)
Other person's CIBIL: 740+ (car loan, some commercial loan history, all paid)

 

[helloworld]

Hi folks need some advice.

1. Which bank(s) would be good to take HL? PSUs or Private banks. Which ones offer the least interest rate?

2. Should I become a joint owner in the loan with my fatheror should I plan to save taxes using HRA/rent way? If I become a joint owner initially is there any chance to use rent way to save taxes later.

My CIBIL: 770+ (only CCs)
Other person's CIBIL: 740+ (car loan, some commercial loan history, all paid)

1. SBI always has least interest rate and lengthy process.

2. Joint increases loan eligibility, if your income already sufficient then sole is also enough. Joint has to register property or any changes in future.

 

[snike1792]

Hi folks need some advice.

1. Which bank(s) would be good to take HL? PSUs or Private banks. Which ones offer the least interest rate?

PSU are better as they offer the least interest rates and close to no hidden charges when you pre pay some part of the loan or if there any any changes in the interest rates. Although the paper work is more as compared to a private bank but its worth the headache before hand as it will save you lakhs.

Also try to look into overdraft/max gain variant of the home loan which many of the psu banks offer like sbi, bob, union bank, which will in turn help in reducing your overall interest paid to the bank.

 

[shivamk]

Joint has to register property or any changes in future

Didn't get this. Can you please explain?

 

[shivamk]

PSU are better as they offer the least interest rates and close to no hidden charges when you pre pay some part of the loan or if there any any changes in the interest rates. Although the paper work is more as compared to a private bank but its worth the headache before hand as it will save you lakhs.

Also try to look into overdraft/max gain variant of the home loan which many of the psu banks offer like sbi, bob, union bank, which will in turn help in reducing your overall interest paid to the bank.

Thanks for the details. Will checkout max gain variant.

 

[6ix9ine]

Didn't get this. Can you please explain?

I think 'joint' means you and your spouse. Btw, I had a car loan from SBI in 2022 and finished it fully in 2023. Prepayment was absolute breeze on SBI.

There was no penalty or anything. I could transfer the payment from my own internet banking, just like sending money to a friend. PSUs are always the best for loans as they offer low rates. I personally like SBI as they are great at that.

Also, we might expect a cut in the repo rate soon in the upcoming months, which will make loans cheaper ^^

 

[shivamk]

I think 'joint' means you and your spouse. Btw, I had a car loan from SBI in 2022 and finished it fully in 2023. Prepayment was absolute breeze on SBI.

Not with spouse but with father

There was no penalty or anything. I could transfer the payment from my own internet banking, just like sending money to a friend. PSUs are always the best for loans as they offer low rates. I personally like SBI as they are great at that.

Also, we might expect a cut in the repo rate soon in the upcoming months, which will make loans cheaper ^^

Thanks for the review bro. I am surely preferring PSUs now.