Home EMI Payment

There is a clear indication that can hardly be ignored - India is fast turning into an EMI nation. Sluggish economy, high inflation, declining rupee, soaring crude oil and gold price, none of these dither home buyers in India. Banks, NBFCs or non-banking financial companies offer EMI schemes that perpetually enthuses home buyers to avail home loans.

Ramifications of committing to an improper home loan EMI can be many. Prospective home loan borrowers can take a prudent decision by understanding calculation of EMI and the features of various home loan EMI repayment options.

Calculation of EMI :

India is not new to EMI. Decades back Indians consumers were averse to paying interest. Not anymore. The vast availability of products, the overlapping 'wants' and 'needs' and the host of benefits EMI offers, it's become the way to spend. The visible EMI advantages include:

• Pay in part, enjoy in full
  
  
• Less impact on monthly cash in hand
  
  
• Feasibility to plan any investment
  
  
• Personal budgeting is easier
  
  
• Funds available for contingency plan
  
  
• Avail tax rebate (Tax deductions up to Rs 1 lakh available on loan repayments)
  
   

Ignorance about calculation of EMI can spin a special privilege into a burden. Knowing the calculation of EMI, one can decipher the principal amount, the interest amount and hidden cost, if any.

• Evaluate affordability of loan
  
  
• Enables comparison between different competitors
  
  
• Understand components of EMI
  
  
• Choose the best and appropriate deal
  
  
• Compare different EMI options (method of computation)
  
  
• Calculate or arrive at an individual specific EMI amount
  
  
• Generate a personalized payment schedule
  
  
• Pros and cons of increase or decrease tenure
  
  
• Increase or decrease EMI amount etc.
  
  

Home loan amount, interest rate and repayment tenure in months are components of EMI calculation. Other charges like processing fee, administrative charges and pre-payment charges also form part of EMI. If insurance facility is offered, a small amount as premium is charged which is added to the EMI.

(P) Principal Loan amount: Sum of money availed as loan.

(R) Interest rate: Rate of interest charged for the loan

(N) Tenure in months: Months to repay the loan

Interest rates: Home loans are offered at either fixed rate interest or floating rate interest. Some banks offer semi-fixed rate home loans or hybrid interest loans which are partially fixed and partially floating. Herein, the interest rates are fixed till a particular period. Subsequently rates will be variable and linked to the base rate. This offer provides the advantage of stability for the period when interest rate is fixed thus helping borrowers plan finances better and also extends protection against fluctuations in interest rate.

Fixed, semi-fixed or fluctuating, take time to fully understand how interest rate determines EMI calculation.

Fixed interest rate: A fixed interest rate will not change during the period (term) of the fixed rate. At the end of term, home loan buyer can either choose a new one from the rates available at that time, or change to a floating interest rate.

Pros

• No need to track or worry about changing interest rates
  
  
• Unaffected by volatility of market
  
  
• Immune to fluctuations in interest
  
  
• Advantage of knowing liability every month
  
  
• Suitable for fixed EMI commitment
  
  
• Fixed rates can be lower than floating rate
  
  

Cons

• Cannot avail benefits of a decline in interest rate, if any
  
  
• Fixed rate is usually 2% more than floating rate
  
  

Floating rate of interest: Floating rate of interest is subject to fluctuation in tandem with macro-economic developments including, liquidity, inflation and monetary policies.

Pros:

• A decrease in interest rate means lesser EMI
  
  
• Change in interest rate reflects either in form of change in EMI loan or tenure of loan
  
  
• Is availed at interest rate lessen than fixed interest rate
  
  

Cons:

• Exposed to interest rate risk
  
  
• Possibility of unplanned increase in EMI
  
  

Example:

Home loan amount: P

Interest rate: r

Tenure: n (convert years in months)

Formula for calculation of EMI:

E= P x r x (1+r) n / [(1+r) n-1]

Wherein,

P – Principal amount

r – Interest rate per month (if interest rate per annum is 10% then it would be 10/12x100)

n – Tenure in months or the number of installments in the tenure.

Home loan calculator serves as a quick guide before opting for a personal assessment. The EMI calculator will also give a breakup of the EMI which is the principal component and the interest on that loan. 
It is common for prospective home loan borrowers to misinterpret or not know how to arrive at an individual specific suitable EMI. Remember, of the three variables, rate of interest cannot be adjusted or specified. But, the tenure can be increased or decreased to find a suitable loan and its corresponding EMI. Do note that any increase in tenure will result in higher interest component on the same loan amount. The advantage however is arriving at a suitable EMI.

Points to remember:

• Longer the tenure higher the interest payable.
  
  
• Shorter the tenure lesser the interest payable.
  
  
• Short term loan is cheaper than long term loan.
  
  
• Decrease in EMI is not proportional to increase in loan tenure.
  
  
• Repayment of interest is more in initial repayments.
  
  
• As the loan matures principal gets paid.

Calculation of EMI in a Spreadsheet

Alternatively, it's possible to calculate EMI in Excel spread sheet using PMT function, which has the syntax:

=PMT(RATE,NPER,PV,FV,TYPE)

Just place the formula in a cell in Excel spreadsheet and calculate the EMI value. An important point to remember is with regard to the interest rate. The rate to be used in the formula should be monthly rate. For example if the rate of interest is 12% per annum then account for it as 12% divided by 12 months which is 1% or 0.01. Further, the last two parameters, namely FV and TYPE are optional and if ignored will be assumed to be 0.

Home loan EMI repayment options

Home loan providers including banks and other lending institutions offer varied EMI repayment options to home loan borrowers so as to customize to individual requirements. Here are EMI repayment options for consideration.

Step-up option: Also referred to as SURF or Step-up repayment facility is best suited for home loan borrowers who have just kick-started their career. The scheme name literally translates into raising EMI or step by step raising EMI with the gradual monetary growth or increase in earnings as the individual moves along in his/her career. Stepping up the EMI can be done in phases, usually twice during the entire loan tenure.

Key features:

• Feasible loan for youngsters kick-starting career
  
  
• Allows for smaller EMI amounts during the initial years
  
  
• Young age and a long-career ahead raises eligibility of borrowers
  
  
• As initial payments go towards interest, tax benefits are high
  
  
• Flexible investment options in other investment portfolio
  
  
• Subject to increased interest rate risk, especially if floating interest rate is chosen.
  
  

Step-down repayment option: Also referred to as FLIP or flexible loan installment plan, the plan is best suited for home loan borrowers who expect a decrease in income in the later years of the loan tenure. A typical example would be applicants who may be closer to retirement age during the later years of loan tenure. The repayment is structured in such a way that the EMI is loaded in the initial years and decreases over the years. The borrower can pay lump sum amounts at predefined time periods thereby reducing the outstanding loan balance. There are schemes that allows for paying higher installments during the early years thus reducing substantial liability of the loan.

Key features:

• Offered only to select borrowers ex: closer to retirement
  
  
• Suitable for combined home purchase, ex: parents and earning off-springs
  
  
• EMI in the initial period will be higher than the EMI in the later period
  
  

Telescopic repayment: Long repayment tenure, up to 30 years is the key feature of telescopic repayment. Home loan borrowers who are young, employed or self employed and wish to purchase own home stretching repayment over a long period can choose telescopic repayment. The advantage of telescopic repayment option is the lower EMIs. Some home loan offers also allow for the flexibility to pre-pay the loan, without any penalty when surplus funds are at disposal.

Key features:

• Borrowers can avail higher loan amount and increase repayment tenure
  
  
• EMI amount is less as it is spread up to a maximum of 30 years
  
  
• Option to pre-pay if surplus funds is available
  
  
• If employed, repayment period should be within age of retirement
  
  
• If self employed, repayment period is restricted to 70 years of borrower.
  
  

Tranche based option: If the loan is towards purchasing an under-construction property, tranche based repayment option is suitable. Being a loan towards under-construction property, the loan amount is disbursed from time-to-time based on the level of construction until the property is completely built. The interest is levied only on the loan amount utilized.

Some home loan lenders extend an additional facility which allows the borrower to fix the installments until the under-construction property is ready. After apportioning for interest on the amount drawn, the balance amount is considered as repayment of principal loan amount.

Key features:

• Interest levied on part of loan amount drawn
  
  
• Option to pay minimum amount (interest) till completion of building
  
  
• Option to pay more than minimum amount combining principal repayment
  
  
• Possible to repay the loan faster.
  
  

Pre-Emi: This is another EMI repayment schedule worth considering especially towards a loan for a house under construction. As such, the entire amount will not be paid to the builder and only partial disbursements are done when stipulated work is completed as per agreement. The loan borrower is entitled to pay interest only on the amount disbursed (partial disbursements) which is called the pre-EMI. After final disbursement of loan to the builder, the actual EMI begins.

Key features:

• Cannot avail tax benefits during pre-EMI period.
  
  
• Tax benefits for pre-EMI can be availed after construction of project is completed over a period of five years in equal installments.
  
  

Accelerated Repayments: Home loan borrowers who foresee a possibility of repaying loan amount through lump sum payments or are confident of increasing EMI with an increase in disposable income can opt for accelerated repayment scheme. Instead of reducing the tenure which is likely to impact tax savings, the borrower can rework the existing EMI and commit a higher amount. As a result, the loan can be repaid faster resulting in interest savings and also avail maximum tax benefits.

Key features:

• Ideal for those who envisage a growth in income/funds in the course of repayment schedule
  
  
• Suited for those who have the means to repay loans faster than scheduled
  
  
• Lump sum payment will reduce outstanding principal only but results in interest savings.
  
  
• Having repaid the loans, planning other investment is possible.
  
  

Final word

Before signing on the dotted lines, do check home loan policies of the bank or the lending institution. Compare interest rate. Look out for hidden costs. And finally, consider cautious words of financial gurus, 'your EMI must not exceed 40% of your take home pay'. The Union Budget of 2014 has made the interest payment on home loan from the taxable income to Rs 2,00,000 from Rs 1,50,000. This amounts to an additional Rs 15,450 from your tax liability.