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Home Loans in India:
Rising Housing Loan Rates in India
Interest rates on home loans have gone up substantially in the last
one year. The rates have gone up from around 7.5% in 2005 to 9% in
2006 further to around 12% at present. This has led to increase in
the equated monthly installments (EMI) in the last one year by around
23% and by 37% since 2005.
As the interest rates on home loan has sky rocketed, many borrowers
are considering to pre-pay the loan from their savings. But, one
should just not rush to withdraw for his savings like provident
fund to pre-pay a part of the home loan. One must evaluate the net
cost of home loan before deciding to pre-pay it.
First of all you should try to find out the net cost of your home
loan after adjusting for tax benefit. Then you should ascertain
the returns your savings are generating. If the net rate of return
of your savings is higher than the net cost of your home, you need
not retire the loan by dipping in such saving. But, if the return
from a particular investment of yours is lower than the net cost
of home loan, it will be a smaller move to pre-pay the home loan
from such savings.
Mind it, there is no penalty for pre-paying your home loans from
your savings. Only if you borrow from a bank to pre-pay the home
loan from another bank, the other bank will ask you to pay a pre-payment
charge at 2% of the outstanding amount.
Tax Benefit
First you ascertain the tax benefit that you get because of repayment
of the home loan. According to Section 24 of the Income Tax Act,
you will get a benefit of deduction of 1,50,000 from your taxable
income against the interest payment for your home loan. Similarly
under section 80C, your taxable income will get reduced by the principal
up to Rs 1 Lakh repaid during a year. Not take for example, as shown
in chart, if you have borrowed an amount of Rs 30 Lakh for 20 years,
your monthly installment will be Rs 3,57,930. That means your annual
installment will be Rs 3,96,396. Out of this, Rs 3,57,930 is adjusted
against the interest and the rest Rs 38,466 is used to repay the
principal. Under section 24, you will get a deduction of Rs 1,50,000
against the interest payment. And Rs 38, 466 will be deducted from
your income against the principal repayment. Therefore, a total
of Rs 1,88,466 will be deducted from your taxable income. At the
rate of 36.60%, including the 2% education cess, you will get a
tax benefit of Rs 57,671. That means, you saved Rs 57,671 because
of the home loan. That also means, the net interest outgo came down
to Rs 30 Lakh, the effective interest rate in the first year is
10.01%.
When
Loan amount is Rs 30 Lakh for 20 years at 12% |
| Annual EMI |
Interest Portion |
Tax Benefit |
Net Interest Outgo |
Effective Rate |
| 396396 |
357930 |
57671 |
300259 |
10.01 |
| 396396 |
353052 |
59163 |
293889 |
9.92 |
| 396396 |
347554 |
60846 |
286708 |
9.82 |
| 396396 |
341360 |
62741 |
278619 |
9.71 |
| 396396 |
334380 |
64877 |
269503 |
9.58 |
When
Loan amount is Rs 50 Lakh for 20 years at 12% |
| Annual EMI |
Interest Portion |
Tax Benefit |
Net Interest Outgo |
Effective Rate |
| 660648 |
596551 |
71937 |
524614 |
10.49 |
| 660648 |
588421 |
74668 |
513753 |
10.41 |
| 660648 |
579261 |
77746 |
501515 |
10.31 |
| 660648 |
568939 |
81214 |
487725 |
10.20 |
| 660648 |
557308 |
84000 |
473308 |
10.09 |
In the second year, as the principal amount reduces by Rs 38,466,
the net interest payment comes down to Rs 3,53,052. And the principal
repayment portion will go up to Rs 43,344. Therefore, the total
deduction allowed under both section 24 and 80C will be Rs 1,93,344.
This will lead to a tax savings of Rs59,163. And, this will lead
to net effective rate in the second year to 9.92%. As the time will
pass, interest potion in the EMI will keep on declining and principal
repayment portion will keep on increasing. So your tax benefit will
keep on going up till the principal repayment portion goes up to
Rs 1 lakh. As shown in the chart, your effective interest rate on
the home loan will keep on declining for the first five years. In
the case of Rs 50 lakh loan for 20 years, at 12%, in the fifth year
itself, the principal portion will cross the Rs one lakh limit and
the tax benefit will be capped at Rs 84,000 at the rate of 33.66%
including 10% surcharge and 2 % education cess assuming that those
who borrowed Rs 50 Lakh will have an annual income of more than
Rs 10 Lakh. But, the effective rate will further come down to 10%
in the sixth year.
That means, if you have money lying idle in the savings account,
where you are earning of 3.5%, you must pre-pay the home loan from
your such savings. But, your provident fund earns a pre-tax return
of over 11% if you are in 30% tax bracket. Similarly, if an investment
in mutual funds is giving you more than 10% return, you should not
retire the home loan from such savings.
Source: Times Property
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