Home Loan Interest

Buying a house has always represented a big investment not only in terms of the property value, but also because of the long term for which you have to repay the home loan.  Therefore, it involves proper planning to ensure that there are no hiccups in the repayment of the loan and your asset remains yours.

The big challlege in last few years has been the rising rate of interest which has made buying property buying even more difficult. What seems to be an attractive rate of interest on paper, most loan takers end up paying a amount much higher than the initial value of theor property in form of of interest on their home loans.

For better understanding, let’s consider the following example. Mr. T has taken a loan of 20 Lakhs @ 10% with a tenure of 20 years.

He pays EMI will come out to be Rs. 19,300/- per month or Rs. 2,31,600/- per annum. As per the loan amortization schedule, Rs. 1,98,510/- will go towards interest repayment while the remaining Rs. 33,100/- will be towards the principal amount during the 1st year.

So for a loan of Rs. 20 Lakhs, Mr. T will pay an additional Rs. 26,32,100/- as interest which takes the total payable loan value to approximately 46.32 Lakhs.

(You can calculate the EMI using the standard mathematical formula or using Microsoft Excel. The other option is to use a credible EMI calculator available online. Here is a good one – EMI Calculator. )

Increased exemption on home loan interest will help matters

It is clear that interest is paid on home loans are high. To provide some relief to existing homeowners and potential house-buyers, Finance Minister has increased the exemption on the home loan interest from Rs. 1.5 Lakhs to Rs. 2 Lakhs in the Union Budget 2014.

Let’s go back to the example mentioned above to understand how this would help. Pre-budget, Mr. T was taxed on an amount of 48,510/- for the 1st year since the exemption was limited to 1.5 Lakhs. However, post-budget, Mr. T will save tax on the whole interest amount as it is lower under the new limit. However there are questions on the practical scope of the proposal. Experts are right in saying that the effect of this increased exemption will be inconspicuous in Tier-I cities due to the higher property rates. However, Tier-II and III cities where property rates will be between Rs. 25-50 Lakhs will benefit significantly from this reform.

This increased exemption on home loan interest and taxable income increases the spending power of the taxpayer. Add to that the fact that Rs. 4000 crores are going to be invested towards affordable housing, potential home buyers will now have renewed interest and a very positive outlook when thinking of buying or investing in property.