HOME LOAN

There are two factors to your home loan repayment,  the EMI -- the amount you pay back every month-- and the total amount to be paid back, which is EMI times the repayment period. Normally, we focus only on the EMI and forget the total payback.  Once you have taken the loan, as interest rates change, both the EMI and the term (number of months) change. And like I found out recently, minor changes in EMI can bring about REALLY HUGE changes to the total amount you pay the bank. Specifically, increasing the EMI by a couple of thousands can bring your total payback down by tens of lakhs, if not crores!

This is because every EMI has two components, principal repayment and Interest. In the initial years, the principal component is very small, but even a small change in this can make a huge overall impact.

To understand how this works, lets start at the beginning.

About two years back, I joined the ranks of the many who took a home loan. Back then,  the floating loan rate was 7.5%, and interest rates being equal, my key concern was to find a bank that processed the application really fast -- you see, the real estate price boom had started, and I did not want the seller walking out of the deal. So, it was with the country's that I signed on.

At 7.5 % and 20 years, I would have to pay back 1.84 times what I had borrowed.  For example, a loan of rupees 50 Lakh repaid in 240 months, would mean a total payback of 91.9 L