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What your banker may not tell you about Home Loans

09 December, 2020

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What your banker may not tell you about Home Loans

Taking a home loan has its own advantages. But, it can sometimes become a big liability in your life. Say, you had taken a home loan and have been paying regular EMIs for the past 5-6 years and one day you decide to check the amortization schedule of your home loan to avail the tax benefits as you recently moved into your new house, or got its possession. You will notice and realize that the EMIs that you have been paying all this while has only paid off a small portion of the principle of the hole loan and a much more quantity of the interest that has accrued all this while on the home loan which you had taken.

This happens because of a system which is used by most banks today to optimize their profits. This is called the Front Loading Method. In this method, the borrower first paying the interest first, and then move on to pay the principle of the loan amount. Banks mostly have a higher interest rate when it comes to home loans and a longer tenure which enables them to increase the profitability of the banks. This method lets the bank minimize their risk of loan defaults and ensures them to run a profitable institution.

Let us take an example which will help us to understand how this method works. Say, you took a loan of Rs. 50, 00,000 @8.5% for 20 year tenure. You will find that the total interest which you have to pay at the end of 20 years is almost same as the amount for which you had taken a loan. The total interest payable will be amounting to Rs. 54, 13,879 and your total payment will be around Rs. 1, 04, 13,879. Thus, the amount of interest keeps on increasing with longer tenure periods. Always opt for plans which have a shorter tenure period and by doing so; you will be able to utilize the tax exemptions under Section 80C and 24B to your benefit.

Always be smart and aware of the things around you. Pay attention even to the minute of details when it comes to home loans or any kind of loan, for that matter. Go through all the schemes and always choose the one which suits you the most. For more details and suggestions, visit https://chqbook.com

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