Equated monthly installment (EMI) is an unequal combination of principal and interest due to the lender every month. During the initial years of loan repayment, a bulk of EMI goes towards interest repayments. Towards the end of the repayment tenure, it is more of the principal that is being repaid, and not interest amount.

How amount of EMI is determined

There are three parameters that directly impact your EMI outflow. The total loan amount, tenure of loan and rate of interest charged. The more the money you borrow, larger will be your EMI outflow. Hence, it is always advised to borrow as little as possible and avoid defaulting.

Shorter the tenure of the loan, greater will be the EMI due every month. If the tenure of the loan is short, the borrower will be debtfree sooner and is a good option in uncertain or volatile conditions. A borrower's monthly EMI outflow comes down significantly, in case of a longer tenure. However, long tenure loans are associated with higher cost of borrowing.

The higher the rate of interest, higher will be the EMI. Hence, home buyers shop for lenders who offer a low rate of interest for their home loan.

EMI and prepayment

In the initial years of the loan tenure, a major portion of the EMI goes into servicing debt. In other words, the borrower's contribution towards the interest component is very high and principal repayments are low. Since prepayment penalty is a percentage of the principal outstanding, early prepayment could cost you more in terms of prepayment penalty.

Before deciding to prepay your loan, take into account the tax benefit you could be losing. Further, weigh the consequences of repaying ahead of schedule.

Flat rate and reducing balance

The method of EMI computation can impact the EMI a bank levies on you. When the EMI is computed on a flat rate basis, the interest rate on the loan amount is calculated over the full duration of the loan. It does not matter how much you have repaid. A flat rate loan is higher because it does not take into account principal repaid.

In case of reducing balance, interest computation is made on the loan amount outstanding. In case of annual rest, principal repayments are accounted only at the end of the year. In case of monthly rests, the principal on which interest is charged goes down every month. The borrower is most benefited by interest computation on daily reducing balance method.

Bargain for low EMI

If you are paying double digit interest rate, perhaps you must explore the switch option. Many lenders are offering close to eight percent interest rate to new borrowers. You can always negotiate for a lower rate. An unblemished repayment record, no history of defaulting and a stable income level will work in your favour. It is always advisable to stay out of further debts if you find it difficult to make EMI repayments.

One of the most attractive features of a housing loan is that it helps in reducing your income tax liability, and thus makes it easier and cheaper to build a fixed asset. A housing loan makes you eligible for tax rebates under Section 80C and Section 24 of the income tax regulations.

A joint housing loan comes with the twin benefit of increasing the overall loan eligibility and the income tax rebate that can be claimed by both co-applicants individually under Section 80C and Section 24. The mandate in claiming the income tax rebate is that the co-applicants of the housing loan should also co-own the underlying residential property.

Who are eligible?
A joint home loan can only be availed by a minimum of two and maximum of six applicants. A borrower cannot take a joint home loan with just any person. In general, the lender defines the relationship between co-borrowers eligible to take such a loan. A joint housing loan is given to married couples or close blood relatives like parent and child.

Some banks allow brothers to take a joint home loan provided they will both be coowners of the property. Usually, banks insist that all coowners of the home must be co-borrowers in a joint home loan. Generally, friends or unmarried couples living together are not allowed to take joint housing loans.

Ownership structure

The ownership structure of the property is a very important factor in case of a joint loan. Ownership of the house makes one eligible for the tax benefits. The tax benefits are applicable in ratio of ownership in the property and therefore the ownership of property should be carefully decided keeping in mind the re-payment capacity of both the borrowers.

In case a person is just a coborrower of a loan and not a co-owner in the property, he cannot claim the tax rebates. On the other hand, if the coowners are equal owners of a property but if the share of the loan is 2:1, the tax benefits can also be availed in the same ratio. Usually, banks do not accept split EMI payments (two or more cheques for the same EMI). The EMI in joint accounts can be made through a joint account owned by coborrowers or by splitting EMIs in a financial year in the proportion of loan share.

Income tax benefits

The income tax benefits are applicable in proportion to the ownership structure. For example, if the ownership in a property is 60:40, a loan of say Rs 50 lakhs will be split as Rs 30 lakhs and Rs 20 lakhs respectively and this ratio will be applicable while calculating tax benefits on interest/principal repaid on this loan. Therefore, it is advisable for joint owners to procure an ownership sharing agreement stating the ownership proportion on a stamp paper as legal proof of the ownership.

The case for the housing loan gets stronger in case of joint applicants. Banks consider the earning potential of co-borrowers and decide on the eligibility of the loan. Therefore, the loan eligibility increases in case of joint loan account.

The joint account holders (owners of the property) can claim income tax benefits individually. The housing loan benefits that fall under Section 80C and Section 24 of Income Tax Act make each borrower eligible for a maximum deduction of Rs 1 lakh and Rs 1.5 lakhs associated to principal repayment and interest payable on the home loan respectively. For example, a husband and wife, both of whom are tax payers with independent income sources, get tax deduction benefits, with respect to the same housing loan to the extent of the amount of loan taken in their respective names. The maximum deduction in such a case would Rs 2 lakhs on the principal repayment and Rs 3 lakhs on interest payment.