Are you one of those who took a home loan some time back. Are you shocked by the increasing interest rates? Want to reduce your home loan burden? The common advice is to prepay a part of the loan amount. But what if you do not have a lumpsum amount to prepay? You can still reduce your total repayment burden significantly by adjusting your EMI slightly upwards.

There are two factors to your home loan repayment,  the EMI — the amount you pay back every month– and the total amount to be paid back, which is EMI times the repayment period. Normally, we focus only on the EMI and forget the total payback.  Once you have taken the loan, as interest rates change, both the EMI and the term (number of months) change. And like I found out recently, minor changes in EMI can bring about REALLY HUGE changes to the total amount you pay the bank. Specifically, increasing the EMI by a couple of thousands can bring your total payback down by tens of lakhs, if not crores!

This is because every EMI has two components, principal repayment and Interest. In the initial years, the principal component is very small, but even a small change in this can make a huge overall impact.

To understand how this works, lets start at the beginning.

About two years back, I joined the ranks of the many who took a home loan. Back then,  the floating loan rate was 7.5%, and interest rates being equal, my key concern was to find a bank that processed the application really fast — you see, the real estate price boom had started, and I did not want the seller walking out of the deal. So, it was with the country’s leading private bank that I signed on.

At 7.5 % and 20 years, I would have to pay back 1.84 times what I had borrowed.  For example, a loan of rupees 50 Lakh repaid in 240 months, would mean a total payback of 91.9 L

Many interest rate hikes later,  I got a nasty shock  when a letter landed from the bank informed me that my loan repayment now stretched to 41.5 years at a much higher EMI! I immediately shot of a mail to the bank asking for a clarification. Some followups later (somehow, questions on the home loan are never responded to immediately), all I got was an amortisation statement, listing out month by month payments for yes, 41.5 years!

And when I sat down and added all that up, the amount due had me in a deep shock. I now owed the bank 5.06 times of what I had borrowed.  To use our example,  someone borrowing 50 Lakhs now had to pay back 2.53 crores!

What in the blazes was happnning?

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