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Do you’ve got a house mortgage excellent or are you planning to take a house mortgage?
If ‘Sure’, do you actually perceive the nuances of how a house mortgage EMI works?
Let’s discover out.
Try to reply these 3 questions.
Assume you’ve got taken a house mortgage of Rs 50 lakhs at 8.50% curiosity for a tenure of 20 years with an EMI of Rs 43,391.
Query 1: Within the first 5 years you’ll have paid a complete EMI of ~Rs 26 lakhs (learn as greater than 50% of your authentic mortgage quantity). How a lot of your principal mortgage quantity have you ever repaid?
Choice A – 30% to 40%
Choice B – 20% to 30%
Choice C – lower than 15%
Query 2: For the 20 yr house mortgage, how lengthy does it take to repay 50% of the mortgage quantity (principal)?
Choice A – 10 years
Choice B – 12 years
Choice C – 14 years
Query 3: For the mortgage of Rs 50 lakhs, what’s the whole EMI quantity that you just pay over 20 years?
Choice A – Rs 70 lakhs to Rs 80 lakhs
Choice B – Rs 80 lakhs to Rs 90 lakhs
Choice C – greater than Rs 1 cr
Now let’s test in case you obtained them proper!
The right solutions are,
Query 1: Within the first 5 years you’ll have paid a complete EMI of ~Rs 26 lakhs (learn as greater than 50% of your authentic mortgage quantity). How a lot of your principal mortgage quantity have you ever repaid?
Appropriate Reply – Choice C (lower than 15%) – its really 12%!!
Query 2: For the 20 yr house mortgage, how lengthy does it take to repay 50% of the mortgage quantity (principal)?
Appropriate Reply – Choice C (14 to fifteen years)
Query 3: For Rs 50 lakhs house mortgage, what’s the whole EMI quantity that you just pay over 20 years?
Appropriate Reply – Choice C (greater than 1 cr) – its 1.04 crs
Shocked!
Right here is the proof – the Detailed House Mortgage EMI desk which reveals the 20 yr journey
*You may confer with the annexure part of the weblog to know the varied columns
How does a house mortgage actually work: 3 Shocking Insights!
INSIGHT 1: In the course of the preliminary years, most of your EMI goes just for curiosity funds!
Pattern this.
For a Rs 50 lakhs house mortgage for 20 years at 8.5% rate of interest…
- Within the first yr, out of Rs 5.20 lakhs that you just paid as EMI, Rs 4.2 lakhs goes solely in the direction of Curiosity – a large 81% of your yearly EMI!.
- 5 years later, the entire cumulative EMI quantity is Rs 26 lakh, out of which Rs 20 lakhs (77% of cumulative EMI) had been solely curiosity funds!
Why does this occur?
As seen from the chart under, a big proportion of your EMI within the preliminary years goes solely in the direction of Curiosity.
Does this maintain true for various mortgage charges?
Sure it does. Traditionally, in India rates of interest have been round 7% to 9%.
Assuming 7-9% house mortgage charges, round 70%-80% of the EMI that you just pay within the first 5 years goes solely in the direction of Curiosity!
INSIGHT 2: When you repay nearly HALF of the mortgage quantity as EMIs within the first 5 years, solely 10-15% of the mortgage is paid off!
In the course of the preliminary years of the mortgage tenure the contribution of EMI in the direction of the Principal is low which suggests the mortgage quantity (principal) repaid can be low.
Within the chart under, for a similar instance of a Rs 50 lakhs house mortgage for 20 years at 8.5% rate of interest, you possibly can see how a lot of the unique mortgage will get repaid cumulatively after yearly.
Right here comes the shocker…
Within the first 5 years the principal repaid is just 12% regardless of paying off 50% of the house mortgage as EMIs!
Let’s test if this holds true for various rates of interest (7% to 9%).
As seen above, this holds true throughout completely different house mortgage charges between 7%-9%.
Solely 10-15% of the mortgage will get paid off the primary 5 years regardless of paying off nearly half the mortgage quantity (45%-55%) as EMIs.
INSIGHT 3: You nearly find yourself paying TWICE the unique mortgage quantity as EMIs for a 20-year house mortgage
Whereas we commonly monitor the EMIs, Curiosity and Principal, what we often overlook is the entire quantity that we’ve got to pay for the house mortgage over your complete tenure.
For a Rs 50 lakhs house mortgage at 8.5% curiosity, you find yourself paying Rs 1.04 cr over 20 years – that is nearly 2 occasions the mortgage quantity!
Curiosity is greater than the mortgage quantity i.e. Rs 54 lakhs!
Within the desk under you possibly can see that even at completely different house mortgage charges (7-9%), you continue to find yourself paying nearly 2 occasions the unique mortgage quantity.
Understanding all of the above 3 nuances of how a house mortgage actually works, is vital to make sure that you don’t get annoyed within the preliminary years.
3 Concepts to handle your house mortgage higher
IDEA 1: Use 5 yr cumulative blocks to know how your house mortgage EMI is cut up throughout Curiosity and Principal
Assume you’ve got a mortgage tenure of 20 years. To make it easier, divide this into 5 yr blocks (4 on this case) and summarize the cumulative totals.
This makes it simpler and easy to know the proportion of EMI that goes in the direction of Principal vs Curiosity.
To calculate this, you should use the house mortgage EMI calculator right here.
IDEA 2: Attempt to prepay in early years and improve your EMI yearly according to your wage improve
Since within the early years of mortgage tenure the vast majority of EMI goes in the direction of curiosity, it’s higher to prepay a few of your house mortgage within the preliminary years of the mortgage tenure which is able to assist cut back the entire quantity paid (over the tenure for the mortgage) and shorten the mortgage tenure. House mortgage prepayments merely imply you pay a sure portion of your mortgage quantity sooner than the deliberate compensation interval.
This may be performed in two methods
- Growing your EMI yearly as your wage will increase
- Prepay everytime you obtain any lumpsum quantity or bonus
How a lot of a distinction does it actually make?
- Should you prepay 1 further EMI yearly, then your whole EMI funds (over the mortgage tenure) cut back by nearly 20% of the unique mortgage quantity.
- Should you prepay 1 further EMI and in addition improve this by 5% yearly, then your whole EMI funds cut back by nearly 25% of the unique mortgage quantity.
- This will get even higher if you’ll be able to prepay extra/improve the EMI.
Within the desk under we’ve got in contrast the Rs 50 lakhs house mortgage assuming no prepayment, with prepayment and with yearly improve in prepayment.
IDEA 3: If house mortgage charges go up, don’t neglect to extend EMI or Prepay to maintain tenure fixed
Whereas taking a house mortgage we often hold the prevailing house mortgage fee in thoughts and don’t plan for conditions like a rise in house mortgage charges. When rates of interest go up, whereas your EMI stays the identical, the banks improve the tenure of your mortgage.
So, each time your house mortgage charges improve, don’t neglect to extend your EMI or prepay – to maintain your mortgage tenure the identical.
Summing it up
- Perceive these 3 nuances of a house mortgage EMI
- In the course of the preliminary years, most of your EMI goes just for curiosity funds
- When you repay nearly HALF of the mortgage quantity as EMIs within the first 5 years, solely 10-15% of the mortgage is paid off
- You nearly find yourself paying TWICE the unique mortgage quantity as EMIs for a 20-year house mortgage
- Use these 3 concepts to handle your house mortgage higher
- Use 5 yr cumulative blocks to simplify and perceive how your house mortgage EMI is cut up throughout Curiosity and Principal
- Attempt to prepay in early years and improve your EMI yearly according to your wage improve
- If house mortgage charges go up, don’t neglect to extend EMI or Prepay to maintain tenure fixed
Annexure:
House Mortgage EMI desk Glossary:
Opening Steadiness = mortgage excellent firstly of the yr
EMI paid yearly = yearly EMIs paid (month-to-month EMI * 12)
Curiosity paid yearly = from the yearly EMI, the quantity that goes in the direction of curiosity
Principal paid yearly = from the yearly EMI, the quantity that goes in the direction of principal
% of curiosity and % of principal = the proportion of EMI that goes in the direction of curiosity and principal
Closing Steadiness = mortgage excellent on the finish of the yr
EMI paid cumulative = whole EMI paid until date
Curiosity paid yearly = whole curiosity paid until date
Principal paid yearly = whole principal paid until date
% of Principal paid = whole principal paid until date as a proportion of mortgage excellent
Cumulative EMI paid as % of whole mortgage = whole quantity paid until date as a proportion of mortgage excellent
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