POSTED BY April 14, 2011 COMMENTS (560)

ONDo you know who to calculate **principle and interest** part in your home loan’s EMI break up? Do you know how each EMI is distributed to principal and interest repayments? It is extremely important to have this knowledge because a lot of real life decisions like prepaying the loan, opting for the loan tenure and many more such aspects depend on how your EMI is structured.

What happens in a general scenario? Loan is opted for from a Bank and you start paying your EMIs each month as contracted (see this excellent article on how EMI formula is derived). When you pay your EMIs, some part of it goes towards interest and remaining towards principal repayment. So each month you are reducing your loan by some extent and now as your loan have reduced, you will be paying less interest on your next instalment. In the same way, with each passing month, your loan gets paid by some amount and balancing amount keeps on reducing resulting in paying lesser interest month on month and year on year and the day comes when you fully close your loan. Note that your EMI is generally fixed and internally it’s worked out into ‘interest’ and ‘principal’ repayments.

However, even today, a lot of people have no understanding of the idea that in the early years of repaying the loan, interest component is very high as compared to principal repayment. The longer the tenure of the loan, the interest component will be higher than principal payments and also the rate at which the interest part will come down will also be lower, making sure that in the initial years most of the EMIs goes towards ‘Interest’ and not ‘principal’.

Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. Sounds disappointing? What is EMI disease ?

In the same way After 100 payments (8 yrs and 4 months), when you would be paying your 101st EMI of Rs 28,950, the interest part would still be as high as Rs 19,891 and the principal part would be Rs 9,060. Still disappointed? Now let’s fast forward towards the end, let’s take 200th payment. When you make your 200th EMI payment of Rs 28,950; this time your interest part would be very less at Rs 8,349 and principal would be Rs 20,601. So now, with all these examples I gave, you can see how interest part is very high in initial years. Let’s look at it from a different point now!

Just consider this- For the scenario above; If you keep paying your EMI’s for 2 yrs (24 payments), you will pay total of 6.94 lacs (24 x EMI) from your pocket, but your loan would just go down by 1.05 lacs! And your outstanding loan would be still 28.95 lacs. In the same way in 5 yrs even though you pay around 17.37 lacs (60 x EMI), your loan outstanding would be down by just 3.06 lacs and loan outstanding would be just Rs 26.94 lacs.

The chart below shows the breakup of interest and principal payment for each year for a 30 lacs loan for 20 yrs tenure assuming interest @10%. So each bar is broken into two parts, where green bar represents Interest part and orange bar represents principal part. It is clearly visible that how interest forms a major part of overall EMI in initial years and only in the later years principal part becomes high.

**Here is the actual breakup of the EMI in numbers**

A lot of investors opt for 15-20 yrs loan thinking that they will pre-pay the loan in next 4-6 yrs itself because of their salaries will rise or for some other reasons. In these cases, for the initial years they keep paying loan interest only and not a lot towards principal. When they prepay the loan, they end up paying a little lesser amount then original loan amount. Example, if you take a loan of 30 lacs for 20 yrs tenure at 10% p.a. and prepay the loan in 5 yrs itself, you will still end up paying 27 lacs as loan outstanding, even though you have already paid 17 lacs in EMI in last 5 yrs, Pre-payment penalty would be extra! But the positive side is that there might be a good appreciation in the house value itself.

So if you are taking loan for longer duration thinking that you would pre-pay the loan very soon, you need to rethink! This makes sense, once the worth of your house has gone up and there is a decent profit. A better option which I can think of is to pre-pay in small chunks each year along with your EMI’s from the start of the loan payment. It would make sure that you principal goes down in big chunks each month.

If you take short term loans, because of the shorter duration, the bigger chunk of the EMI is actually principal part, hence you can look forward to pre-pay the loan incase you wish to.

I have created and found out some loan amortization calculators which you can use for calculating your EMI’s and its breakup into principal and interest for each month.

- Download Excel version of Loan amortization calculator (created by me)
- Use this Advanced EMI calculator (copyright Manu NIIT)
- Download this multi variable EMI calculator (Source : Joe Verghese)
- Use the below embeded Loan EMI breakup calculator (direct link)

By now you must have got a clear understanding on loan amotization and how home loan EMI is broken into principle and interest component. Note that the asssumption for this article was that the loan is on “Monthly Reducing Balance”

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helpful article learn more at http://www.loankuber.com/content/emi-calculator/

The Loan amortization calculator really helped me understand how the interest part is calculated every month.

Thank you very much for providing such useful information and tools.

Glad to know that Sam ..

Hi Manish,

I m planning to take a home loan for 30 Lakhs for which I have checked EMI in different Home loan calculators & found it to be around 31K for 15 years. So if have additional funds to repay for every quarter, where would that money go will it enter “Interest” or “Principle”. Please help me on this, it would be a benefit if that enters the “Principle category”.

Any additional money will be adjusted against the principle part 🙂

Can’t we reverse the interest and principle? or is it the banks decision.. Also is there any calculation available which includes any prepayment amount periodically along with the regular EMI’s..

You cant do it . THe interest is higher in the start anyways . If you reverse it how will bank make money?

If you make any prepayment, then that will reduce your outstanding balance !

Hi,

I have taken loan of 22,40,000 from sbi and 62,345 for insurance. so total comes to be 2302345.

I have taken disbursement on 2nd august 2014 and started emi from 5th september 2014.

the schedule for interest deduction is as given below. on every last of month the interest component is calculated and gets debited from the account. my actual emi is 21297 but i made a ecs of 21200. My rate of interest was 10.15%

Date Debit Credit Balance

31-Aug-14 PART PERIOD INTER- 18,690.00 -22,58,852.00

5-Sep-14 transfer through ecs 21,200.00 -22,37,652.00

30-Sep-14 INTEREST- 18,691.00 -22,56,343.00

Now my question is

when i compare the above amount interest calculation from the emi calculator(website) it gives me different figures? why so? The interest on the emi calculator is different and the actual deduction that happens is different. could you please explain me on this ? also can you tell me as what formula is used for interest calculation?

I suggest asking for explaination from the SBI customer support on this, as they will give you exact breakup .

Different calculators on websites can have different way for calculating things at times.

Manish

Can you prepare a table for repayment of a loan in which a person pays a fixed amount over and above the emi .for eg if I take a car loan for 5.5 lacs for a 9.5% interest and 7 yr tenure and I pay 20000 instead of 9150 Rs what will be the total interest and how soon the loan will close

That will require a good amount of calculation which is beyond the scope of comments section.

Hello Manish!

Hope your doing good!

Its an amazing article!

Looking for an advise.Suppose I own a house with no outstanding loan on it & getting an offer of 22lakhs for sale, at the same time i have an outstanding loan of 27 lakh on another house does it make sense for me to sell that house & pay off my loan.

Hi Santosh

Thats something only you can decide. There are many factors here which is beyond my understanding , as its related to your case !

Dear Manish,

Thank you firstly for maintaining this service. I have a simple question to ask – I currently have a SBI MaxGain home loan. If I have funds to pay towards the loan, is it better to park funds in the loan OD account, or is there any reason to have sufficient loan balance for gaining from Sec 24 benefits in taxes? I hear friends some time talking about “leaving sufficient loan balance for tax benefits”. I personally don’t see any reason to pay interest, and gain in taxes, but I wanted to confirm that I am not missing anything. Kindly let me know.

Thank you in advance.

Sir my self vikrant singh a borrower of sbi ,, the bank fixed a rate of intrest , it was 14.25 but after 2 year check my loan statement then intest rate is some where 16,8, after 3 month 16 % ,then later 15.8 . What should i do ???

Is it not as per the terms and conditions set in your agreement ?

Hi Manish,

I have taken a home loan of Rs. 10.30 lakhs from SBI for which I will be paying Rs. 26530 monthly EMI for 84 terms. I have already paid the EMI for 34 terms. However, I would like to repay the remaining entire home loan by taking a loan on my FD with SBI, plus gathering some amount from other sources.

How much ( i mean what %) loan I should be getting on my FD which is maturing in Dec’16? Is it okay to tell the bank that I might be using this money to repay the home loan? Will it have any impact on the loan amount I would be getting on my FD ?

I also have OD account with the Bank. Could you please guide me with this regards whether

1. I should repay the home loan as much as I can considering I am not working at present.

2. I should go for OD or a loan on FD.

Sorry I am not eligible to answer this

Hi Manish,

Following are my loan details:

1. Outstanding loan amt: 14 lacs

2. Bank: Bank Of India

3. Tenure remaining: 89 months

4. EMI per month is 21100

I have two questions:

1. Should I switch my loan to the new banks offering lower rates to save some money? I checked the online calculators for balance transfers but most of them are suggesting to stay with my current bank.

2. My bank is offering to pay 0.25% of outstanding amount and lower interest rate to their current base rate at 9.7. In this case, do they give rebate of all previous years as well? i.e. from the period since lower base rate came in effect.

Waiting for your suggestion…

Still waiting for your suggestion…

If your gain overall is more than what you are paying, then it makes sense to move. But you need to check if its worth taking that hassle or not !

Thanks!

i have a question about home loan concept,some one please answer it.

currently i am looking to buy a house of rupees 55 lacks and i have only 10 lacks in hand.

but i have a confusion of buying house now or wait for 5 years and invest 50 k permonth from now(50*60=30L+6lac as intrest).

as i wll have 36L in hand after 5 years and also agree that the cost of present house(similar one) after 5 years may increase a bit

will it be good to take home loan of 45 lacks now or save 36 L as mentioned above for 5 years and buy a home by using this 36L as downpayment??

please suggest with proper reasons for better understanding…..

thanks in advance.

I want to take 30 lakh home loan from bank. My father is a govt. employee and he will retire after two years. So, after two years we will prepay 20 lakh of the loan as he will get a lump sum amount on retirement.

My query is that will the bank give us loan knowing well in advance that a major chunk of the loan will be prepayed?

Why do you want to tell them that ?

Great info. The principal and interest breakup calculator is awesome. I was looking for something like that; I was about give up my search and start writing something in my matlab. You saved me a hell lot of time. Thanks a ton!

🙂 glad to know that !

can you please attach excel sheet where it shows when the loan will get closed for particular emi, rate of interest & loan amount

Will do an article on that !

Dear Manish,

Thanks for the wonderful info.

Will a bank give loan to an individual when it knows beforehand that after 2 years, 60% of the loan will be prepayed. I am in dilemma. Please clear my confusion.

Thanks,

Rashmi Gupta

Bank does not take into account the future, because its not certain .

Dear Manish,

This article really helps. Just wanted to know one thing. In the above example where the person opts for pre-paying the home loan after 5 years but still ends up paying Rs 27 lakhs as principal outstanding, isn’t it unfair that the bank has already collected a huge amount of interest in the first 60 EMIs given that the person is closing the loan in the end of 5th year of loan tenure. Why doesn’t bank give relief and instead charges extra amount on outstanding principal on pre-closure of loan?

Regards,

Dibya

Thats because banking is a “business”

Hi Manish,

I have one doubts regarding this, I have an EMI amount of Rs.15,754 but I am paying over and above my EMI and paying Rs.19,492 per month. So in this case I want to know whether I will be eligible to get a tax benefit on the extra amount Rs. 3,738 that is added towards the principal.

As per the provisional certificate provided by the bank it does not show that extra amount and I am unable to use that amount in 80C. Please suggest how can i utilize that amount.

Thanks,

Misty

Yes, whatever you pay extra goes in your principle outstanding, so it comes under 80C !

Hi Manish,

I have taken a loan of 24lakhs from LIC HFL with 9.6 percent interest on Dec 2015.

I am paying now monthly EMI.

I have taken a tenure of 72 months.

Now there is a lockin period of 6 months after that I am planning to pay 3lakhs that is on July 2016 and again 3 lakhs on Dec 2016.

Now can I do this and how much interest am I saving ?

Thanks,

Pavan

You will have to check for the amortization table for that. Ask that from the company

Loan amortization calculator was very useful.

Glad to know that UdayaKumar ..

very nice and helpful articles that cleared me all my doubts of housing loan.

thanks very much.

Glad to know that atul ..

Hi

i have taken home loan of 11 Lakh for tenure of 20 years. It has been almost three years and my total principal amount reduced only by 50K. I have been paying 10,250 rupees every month as EMI. So all this amount is going as interest?

Then what is the way to reduce it. Will it help if I clear 5 Lakh loan at one and continue paying EMI for the rest amount?

Or would it help if I keep clearing chunks of 50K once in 2-3 months?

Which way will be more profitable?

Hi dileep

THis is how it works. For initial years your major part of EMI goes into Interest only. The best way to deal with it is to reduce the tenure to 10 yrs or 5 yrs, but then the EMI portion will become very very high !

Thanks for your reply Manish

Does part prepayment helps? or am I wasting my money in part prepayments. Is Reducing the tenure the only best option?

Part payment is one good option to take down the outstanding in one shot. Even increasing the EMI means prepayment in parts every month .

Hi Manish,

I took housing loan : 11,75,000.00 from LICHFCL interest rate @10.25%

I started paying EMI 14,264 .000 from 2014 April.

Apart from this i did a part payment of 1,00,000 last financial year.

Current outstanding principal loan amount is: 9,70,124.00

I am in 10% tax slab now. and have PF and insurance policies more than 1.5 lac’s

I can pay 2 lah’s per year now.

Paying part payments is wise now? If yes how much i need to pay part payments in order to get more savings from interest?

thanks in advance,

Rajendra

Hi Rajendra

Its better to ask for AMORTIZATION TABLE from LICHFL . They will give you a report which will mention how much interest are you paying. Only based on that we can understand how much you should prepay

Manish,

Thank you for this article. Very informative. However i still have few questions. in your example

“Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. ”

how did you fix the interest at Rs.25,000? how did you fix on that particular number? did you use any formula for calculation?

I had assumed 10% interest. So 10% of 30 lacs was 3 lacs and for a month it was 3 lacs / 12 = 25k

Manish

Very nice info manish

Hi Manish,

Nice article, However I want to ask you a basic question/confusion that a layman has is prepay the loan or invest.

Also, how we can take into consideration income tax benefit while making above judgement i.e prpay or invest,

Thanks

Sameer

Hi sameer

There cant be one single answer to this. I myself think prepaying is ok because of mindset. Mathematically speaking, it would make sense to invest

One of the best article I have read on home loans. You have explained interest math very clearly . The excel formats are very helpful.

Thanks for posting this

Glad to know that swapna ..

Manish – First of all a nice article refreshing the basics.

I have a question on home loan applicable to me as below. Please comment on that.

I have an outstanding home loan from ICICI bank. With the recent rate change, the new rate applicable for MY loan is 9.75. However for a new loan their rate is 9.65%. In case I want this lower rate (lower by 0.1%) applied to my loan, I have to shell out 0.5% of my outstanding balance. Current situation is:-

18L Principal Outstanding @ EMI of 20881 @ For next 151 months

If I go for rate reduction to 9.65% now, then I have to shell out Rs 9000 now, which I was told would lead to reduction of duration by 2 months.

So this is where I need help in deciding the best course of action. I am spending 9000 now. Even if I assume I do a FD of Rs 9000 for 150 months at a compound interest of 8% compounded monthly – that comes to 25K after 150 months WHERE AS last 2 installment reduction means 20K * 2 –> 40K approx.

So looks like I SHOULD BE trying to get the better rate now by paying 9000. Did I miss anything ? What do you advise ?

I dont think its a great deal . Note that the rate change applies generally by the end of the month. SO you will just get 1 month benefit.

nice article as always..thank you Manish

Glad to know that Meghasyam ..

Manish, great article! Do we have an option to pay less EMI during construction period and move to a regular EMI from the time of occupation? My understanding is that we do not get any tax exemption during construction period.

I dont think so . It will all depend on bank rules

I would disagree to one aspect that, no matter when you repay, like in the above eg. even if you repay the loan after 5 years on 30L @ 10% interest anyway comes to 15L. Now saying that if I would not repay my loan waiting for property value upside or whatever I am taking future price risk plus additional burden of the interest cost the more I delay unless I have an investment opportunity of a rate higher than 10% for the next 15 years (until the date of maturity).

Hence, in my opinion its always better to pay off the loan as quickly as possible, keeping bare minimum of outstanding for tax benefits (around 20L)

Regards,

Rahul

Hey Rahul

Thanks for sharing your experience with all of us. It was a great learning.

Manish

Thanks Manish…..excellent article…

Thanks for your comment Arunkumar

Nice article.

Can u show mathematically how principal and interest is calculated? I mean by formula.

Will update the article with formulas

Hello Manish,

Good article man…It cleared my all doubts for which I was running around bank people…

Thanks for your comment Praveen

Dear Manish,

I am applying for personal loan of 2,50,000, for 5 years at 18.5% rate of Interet from axis bank.

Kindly confirm how do i calculate a Principle amount repayment in every EMI.

Rgrds

Mandeep

You dont need to calculate it, You can just ask for amortization schedule from bank

Also check the calculators attached at the end of this article to understand how to calculate in excel

Hi Manish,

I have a question after reading your article “How EMI’s Principle and Interest breakup is done”. I am a home loan customer and have been paying an EMI of 33000 for the last 5 years for a loan amount of ~32 lakhs. In the last 5 years, not a single rupee has reduced from the Principle. Every year when I receive the Provisional tax statement, there is nothing deducted from the Principle and full EMI is only deducted towards Interest. Is there a rule on these things that I can file a complaint against? or do banks have the right to divide the EMI as they want?

Hi Umesh

You should immediately contact your bank and ask for the explanation. My worry is that, it seems like you are into pre-EMI payment schedule and you are just paying the interest part.

Hello Manish

I know you may have answered this question many times..and I am lazy to ready all the comments/not able to process the information correctly for my case. Sorry for that.

I have a loan of 29.5 lac for 20 yrs for SBI max gain. I have paid EMI for 1 1/2 year @32,886. Now I want to repay my loan, for that I have written a letter to SBI. SBI is not very prompt in answering question over phone 🙂

1. Do I need to do anything apart from writing letter that I want to prepay towards -principal amount?

2. Can I do it via- NEFT(Adding Loan account -NOT over draft). If yes, how many times a year.

3. Is it advisable to prepay the loan in say 1-2 year time, considering I dont need money back.

Thanks.

Hi Manisha

I suggest you visit the SBI branch and take up this matter. Then do what they tell you for prepayment.

Its generally not suggested to prepay so early because you dont benefit at all .

I think need not to prepay the loan so early as Manish ji has suggested.

Since you have taken SBI MAXGAIN, I assume it will be having the overdraft(OD) facility. You can put your surplus money in this OD account and reduce the interest without losing the liquidity. Because you can take out the surplus amount anytime whenever you need.

Rahul Jain

my eyes r opened reading ur article,thank u

Thanks for your comment sirisha

Excellent Article! Can understand the working of the Amortization Schedule very clearly! Thanks to the Author!

Thanks

what law allows the banks to collect more interest in the emi. what i understand is i should be paying interest for the period i have used the bank money. so, if i choose to pre-close the loan, the bank is already charging a penalty. then why do they collect more interest. could the law be so lopsided.

BUt if you close the close you just have to pay the outstanding principle only !

thanks so much for the reply.

very true that if i chose to close after three months i will pay only the o/s principle amount. my point is during these three months has’nt the bank collected interest for more than three months. how is it allowed to collect the int. for more than these 3 months.

mohammed asadullah

How do you know that they have collected more than 3 months of interest ?

Hi Manish,

First of all, brilliant post and really appreciate how you are religiously giving answers to all the queries from 3-4 years now:)

I am young professional and just completed 2 years with IT company. I am planning to take a home loan of about 8 Lacs for 10 yrs with 10% rate, you might have given ans to this previously but still if you can ans once more:

1. Should I go for fixed rate or floating rate given the current environment.

2. Suppose IF I prepay around 2 Lac after a year. Will that help me in getting rid of principal soon.

3.Still even after prepayment, If I try to increase EMI, will that help or not?

4. One more case- If I am willing to pay whole outstanding amount in one go-say after 3 year- how much advantage/disadvantage I would have.

5. Preferable- Public bank or Private bank:)

Thanks

Kapil

1. FLoating

2. Yes

3. Yes

4. You can do that, just that no tax breaks after that

5. Any is fine !

Hi Manish,

I need your assistance and advise on the following. I am currently taking a loan of 30 Lac with a tenure of 10 years, but this loan is based on construction of the flat recently purchased by me. The builder would be raising every 2 or 3 months demand for the payment based on construction and the bank would pay, i need to know what is best option full emi or pre emi and the excel calculation formula or sheet for the same.

Is the tenure of 10 years ok, as i can pay higher amount on yearly basis by atleast 15%.

Pras

that calls for a lot of analysis . I suggest reading other places for this point . Just search over internet and its full of those ideas

In the whole article – you havent clarified on how is Principal portion of the EMI is determined by a bank.

If you see the excel sheet, the formula’s would reveal that

loan : 35 lakh interest :10.20% period : 21 years.

EMI 33749/-

BANK SAYS, THEY WONT CHANGE EMI , EVEN IF I PAY, 7 LAKH AFTER

5 YEARS… IN THAT CASE, WHETHER I AM LOSING OR NOT.??

Hi KATHI

I think its good that they are not changing EMI , instead they will reduce the payment tenure, which is good !

Hi Manish,

I am a regular reader of your site/blog.

I came across this article when I was looking for answer to some weird situation.

I have a home loan (SBI MaxGain) of tenure 25 years amount Rs. 44,18,908 for which I am paying EMI of Rs. 41,511/-

I have around Rs. 4,00,000/- which I can use to make a pre-payment (part payment).

I did some calculation and here is the result –

1. 8003287 Total Ineterst to be paid with no pre or part payment

2. 72,78,829 With Part payment of Rs. 4,00,000/-

i.e. – “Savings of Rs. 7,24,458/- with payment of Rs.4,00,000/-

Net Savings Rs.3,24,458/-”

3. Interest paid = Rs. 51,67,974 With Rs. 4,00,000/- in MaxGain account for entire tenure.

i.e. – Savings of Rs. 2835313/- with keeping Rs. 4,00,000 in MaxGain account till end of loan tenure (plus having liquidity and access to this amount in case of emergency).

I am confused here – how can there be so much of difference? Please help me understand – I can share the excel file I got from SBI when opted for MaxGain loan.

Thanks,

Swapnil

Pune, India.

Hi Swapnil Bhavsar

I am not 100% sure on that. Please open a thread on our forum so that someone who knows the answer can reply you on that.

https://www.jagoinvestor.com/forum/

Manish

To calculate the interest and principal components of the home loan repayments during a financial year (April-March), use this . This tool provides amortization tables for fiscal years.

Very useful while planning for income tax calculations.

Dear Frnd

As first time buyer, I need guidance from you guys ! I have booked a flat cost 33 Lakh. As per my salary i am eligible for home Loan amount around 2200000 for period of 20 years. If I minimise the years, the amount of loan goes down to 10 lack around. As I am able to pay home loan within 5-6 years from other source. please guide how to plan with minimum interest.

Dont reduce the years, because then your eligibility will reduce . The best thing you can do is take 20 yrs loan, and then after a couple of months, raise the EMI, that will reduce the tenure !

Hi,

In my view, it is better to close the loan as early as possible, but why people are worrying about the higher interest and lower interest part of the EMIs, It all depends on your loan term , loan amount and the interest. For example if you are taking a loan of 30 L for a tenure of 15 years. that means you are getting a cash of 30 L immediately from zero. and you have to pay back only in small monthly installments of 15 years.

And you just worry about the prepayment penalty, don’t worry about the higher percentage of interest part in the beginning stage of EMIs. It will be automatically considered while you are applying for a loan prepayment.

Thanks for sharing your views Arun !

Hi Manish,

I read your articles and got a lot of knowledge about this and still have some doubts, could you please clarify.

1) am going to take a home loan of Rs.7 lacs with the rate of interest as 10.15% with the tenure of 5 years. is it profit or can I go for 10 years tenure?

2) If I go for 5 years tenure, as per emi calculation my monthly emi will be Rs.14924(as per the review that I got understood is if go for less tenure, the principle amnt deduction is getting more – Pl correct me, if am wrong). If I done any pre part payment on priniciple, then automatically the balance principle amount and the pertaining interest charges will reduce or not? and cloan get closed quickly or not?

3) If pre part payment done , the emi amnt will change? or it is fixed, in that only the principle and interest charges variation differs with in that?

4) what is floating interest and fixed interest?

Pl clarify me as question by question.

Thanks

Raghu

Raghu

1. If you can afford higher EMI , then better go for 5 yrs tenure only

2. Yes – when you prepay , it will reduce your principle part !

3. No , EMI will remain same. Just principle and interest component will change

4. Floating means it will go up and down depending on the market and fixed means FIXED , which will not change

Manish

Dear Manish,

I read ur answers and articles and understand about the concepts and stills have some doubts.

1) am going to take a loan of Rs.7 lacs for my home loan at interest charges of 10.15%.

am thinking to take a tenure of 5 years. is that profit or can I go for 10 years?

2) Suppose if tenure is 5 years, as per the emi calculator given – my monthly emi amount is 14924Rs. in that interest will be X, and prinicipal will be y( principle will be more if tenure is less deduction from emi amount – as per the review my understanding). If I pay some part pre payment of amount in capital, then my principle amnt will reduce or what? and if my priniciple amnt will reduce means automatically my interest also reduce right? and loan will get closed quickly correct? but the emi amount is fixed on monthly ?

Am not a regular followers of ur article, but its very good articles and I understand a lot in this. thanks.

Pl reply.

Regards,

Raghu

Hi Manish,

I took home loan in Dec.13 from HDFC bank for 26 lac but bank paid to builder 20 lac & remaining 6 lac will pay once will get possession from builder, i am blindly paid installment everymonth from Dec.2013 to Dec.14 keeping in mind that both interest & principal has deducting but i came to know now that only interest amt. has been deducted, when i visited bank they said that once i will get possession after that only principal mount will start to deduct

kindly advise

I think you should have cleared this before hand with the Bank. I guess bank is not at fault here if its clearly written in the agreement, Look at that, whatever is written will be applicable !

Hi Manish,

I have taken Home Loan of 45lacs from the SBI(MaxGain) and paying full EMI(around 45K per month).

But i have used only 35lacs out of my home loan and as of today my current balance is around 33lacs.

I am going to get the possession of my flat in April 2015.

My question is

1) Since my full EMI was based on the actual loan amount (45lacs) but have used only 35lacs and would not be using any loan amount further so should the bank adjust my EMI based on the loan amount i used?

2) So Whatever EMI (45K) i have been paying or paid so far would be adjusted and refunded to me?

Thanks.

Regards,

Jai

Does anybody have any advice on my situation?

Jai

Have you talked to bank on this ?

Hi i have a Home loan from SBI since more than 2 year. While checking my loan account i am able to see that there is no change in my princiapl amount yet so is the bank is charging intrest only, if yes is this correct. Can i get any revision on my paid amount. so Principal amount also can be adjusted in the amount which i had paid till now.

Please suggest the way.

Hi Kalapana

First check with your bank why its happening like that, what is the reason ?

Hi Manish,

Thanks for this wonderful insight. I took loan from HDFC of 56L for 20 years. Starting from 2011 there is no significant change in the EMI and is fixed for 20 years. I have done some prepayment but still paying up huge interest. Is there any way by which my principal amount can be lower down?

Thanks,

Vivek

The only way to bring your principal part down is by prepaying it. If you have prepaid only a small amount, then it will not come down by big margin for many years ! , because interest component is very high in the start of the home loan if the tenure is like 15-20 yrs !

I want to purchase a resale flat in Hyderabad, Could you please is advise which should i go and the loan amount is 2200000/-

This much information is not sufficient to comment anything ..

Hi Manish,

I have a query on calculation of interest on home loan every month. I assume it is on a daily-reducing-balance basis, however, the home loan I have doesn’t quite add up. Here’s an example –

Interest rate = 10.25%

From 31st Aug to 4th Sept, i.e. 4 days, Balance = 971,978

From 4th Sept to 10th Sept, i.e. 6 days, Balance = 1,358,021

From 10th Sept to 30th Sept, i.e. 20 days, Balance = 1,329,169

My understanding is that Interest on 30th Sept = 10.25% * (971,978 * 4 + 1,358,021 * 6 + 1,329,169 * 20)/365 = 10,845

However, actual amount charged in bank = 10,945

Any idea how this amount is arrived at?

Hi Karthik

I think its better to follow up with bank on this , They will give you exact working !

Hi Manish,

I want to say thank you to you. I was one of those clueless individuals about money few months back. I chanced upon your website a few months back and for the last 3 months I am doing nothing in my spare time but go through all your blogs and comments. I have also gone through all the episodes of smart money in Bloomberg TV, investors guide in ET now,read through mint money, money control and value research and several other journals available on the net.In short I can say after this grueling 3 months I feel a more empowered and enlightened person.

I can say when this moment of epiphany came to my life. I booked my apartment a few months back and suddenly realized where all my money that I had earned till date had gone. Then it took a lot of soul searching to find the answers. I was investing badly in things I don’t need. I bought endowment plans to insure a dependent – who incidentally didn’t exist :). I had little clue about tax saving options other than 80c.

I don’t quite agree about prepaying loans if the EMI is within comfort zone.It is much wiser to invest the money – because otherwise we are knocking off a depreciating liability with an appreciating asset.

To put things into perspective say a 50 lacs home loan in 20 years you repay 1.25 crore in total – where as if you put 50 lacs in FD for 20 years @9% you get around 3 crore. I am not considering tax benefits and IT for clarity’s sake.Also, the EMI should ideally become easier to deal as the years go by and our salaries increase.

If you foreclose, you also lose the entire liquidity of the money – should you ever need this.

A counter argument to this is if you prepay the loan the EMI stops and you can invest that amount into savings. But, many a people would heave such a sign of relief when loan is closed that they would overspend that amount till some years after which they will consider savings. Also, the entire liquidity is lost in case of prepayment – so when people actually start saving that amount it will be invested in building emergency funds and only then will they start thinking about SIPs.

Your thoughts on this?

Thanks for sharing that Amitava

Glad to know how you benefited .. My comment on prepaying the home loan was mainly because most of the people dont like the debt and want to get rid of it .. Thats why I said that. If you look at purely number, I agree with you !

Hi,

Could please help out for below question.

October 11–>Interest amount is 700, principal for the first month ? outstanding bal ?

November 11–>Interest amount is ?, principal for the 2nd month is 300 outstanding bal ?

What about the other data ?

Can you please help me in finding out the outstanding balance on prepayment of Home Loan? The facts in brief are that I had taken loan of Rs. 40.72 lakhs on the then floating interest rate of 11% to be repaid in 180 instalments in EMIs of Rs 44,383/-. After paying 74 instalments I want to repay the outstanding balance by selling the property in question. Can you please work out the outstanding balance to be paid?

Thanks

You can just ask for amortization table from your bank itself, they will provide you that !

Hi thanks for this nice Post……I am making one calculation. Please go through it and let me know whether its proper.

Suppose I am taking Loan of 40 lakh..Now we need to give EMI to bank as bank disburse amount to builder..

Now if I am getting possession by Mar-2016 and I am taking loan on Sept-2014, my EMI of approx. 40000 RS will start on Mar-2016 and before that my EMI will be as per bank disbursement, but in this period i.e. form Sept-14 to Mar-2016 if I try to make part payment of 8 lakh then my Loan amount will be approx. 32…i.e. I am doing part payment of principle only not interest , Right ?.. So that at the time of possession my EMI will be approx.. RS 32000.

As you told that initially we pay interest more and principle less so can we have option While taking home loan, that I want to pay Principle more and interest less… if this option is available then is it beneficial ?

Waiting for ur reply. 🙂

Any prepayment you do gets deducted from the outstanding loan . So your principle comes down and your interest payment comes down 🙂

Dear Manish!

Thanx for your article/blog and pains taken by you in answering the queries. I am planning to buy a house worth 63 lacs. SBI is offering only 80% ie about 50 Lacs of this amount but ICICI is ready to loan up to 60 lacs. Interest rates are same in both banks as of now. As far as I have understood through your teachings that monthly and daily reducing manners do matter when one prepays the loan.

Now my question is – as I need more loan, should I go for ICICI now to meet my needs (though I am really scared to read experiences with ICICI) and transfer this loan to SBI within 3-6 months. ICICI is saying that they don’t charge Transfer Penalty. Is this a wise decision? Second- if I take a joint loan with my wife,Can the entire Tax benefits/Deductions under 80C be utilized by one person or not, rather than by both of us.

Plz do reply soon.

urs

Anurag

yes its a good idea overall , because that the only option anyways for you . You can transfer it later in SBI ..

I had a home of Rs. 31 Lacs at 10.5% pa for 180 months, EMI payable monthly Rs.34,270/= pm. I’am paying regularly Rs.3.75 lacs per month for the last 3 months and will continue to do so. Can you please tell me 1.How many months it will take to close the loan. 2. How much interest i would have paid when closing the loan and 3.How much interest savings i would have got. The bank charges no penalty for prepayment.

It will take just 10 month to close the loan

I have taken the loan of 25 Lacs loan is for 240 month if want to repay it before 240 month it will be benificial for me also what condition will be for repayment

Yes, you will save a lot of interest amount if you prepay ..

Hi

I took LICHFL of 22Lac @9.5% fixed INT for 5 years. Its beeing 3 year and 2 more years left for Fixed Rate.

I am thinking of switching it to SBI maxgain. but is it a good idea to switch to SBI maxgain now or shall i wait 2 more year to complete fixed rate and once floating start then switch it.

Regards

Rahul

You will have to do comparison of both the situations and then decide, there cant be a quick answer to this

Hi Manish ,

This one is really a good. I was looking for something which let me know how intrest-principal get distributed.

In my case , i have loan of LIC 22Lac @9.5% fixed ROI for 5 years and EMI is 20504.

NOw my first EMI is May 2011 but got possestion in July 1012, with first EMI i started full EMI ,due to which till the time my actual EMI start (Intrest-principal) , i have paid around 1.08 Lac towards principal from my EMI. Now my current outstanding is 196500 after paying 36 installment (36*20504), NOw i want to make part payment of around 2Lac. How can i calculate Intrest-Principal ratio aftre paying 2LAC as part payment, (my EMI and rate of intrest will remain same ).

Your sheet only help us to calculate right from First EMI but how can i come to know how much amount will go to Intrest and what would be toward principal if i made part payment.

Thanks in Advance.

But with the sheet you can see how it works, when you make the prepayment, that 2 lac will get deducted from the loan outstanding amount , then whatever remains is your loan outstanding, then you calculate the next month INTEREST on that amount, and deduct it from EMI amount, what you get is your priciple payment for next month . I hope you got it ?

Also you can ask your lender to provide you the provisional sheet for interest and priciple !

GOOD SERVICE SIR, THANK YOU

Hi, Manish ji

your article gave a very good insight of EMI.

i am an auditor working in coop dept, we rarely have EMI method in our coop society. Recently i was allotted a society which is using EMI method. I want to know how to treat the EMI Balances in P&L a/c and Balance sheet. How the interest receivable account as at the end of the financial year can be calculated to carry it in p&L and Balance Sheet. Do we have to calculate the interest part for each loan separately.

Hi OM

I believe your question is very different from Home loan EMI ! .

hi manish ji,

my question is not as a Loan Applicant,

my question is as an auditor of a society which issues EMI Loans for consumer durables & home loans.

my problem is i am unable to workout the actual asset under Loans & advances

and the interest accrued on the Loans

please explain as to how to represent the Loan & Interest Due from the loanes in the balance sheet of the society

Hi Om

That query of yours is a little advanced one it seems. I suggest a good CA will be able to handle it.

Mr. Manish,

I have got the home loan from SBI for the period of 20 years and my EMI is 24,400.

My loan got sanctioned under the scheme of first 3 years at fixed rate of interest and after three years it is at floating rate @ 2.75% less than BPLR.I just want to know, as my EMI is fixed, how this changes in Base rate will have an impact on my repayment schedule. Also can it be possible for getting transferred my loan into floating rate based on base rate rather than on BPLR based?. Kindly suggest me the solution.

Thanks,

K.Ravi

If its on FIXED rate , then it means that base rate has no relation to you in first 3 yrs, its FIXED.

I have taken loan for Rs 94 Lacs * 12% interest for 20 yrs. EMI is 103503, which i got by calculation but i want to know on what basis they decide the principal amount (9502) and interest amount (94000)??? I want to know the calculation of Principal amount…who and on what basis it is calculated?

Anybody pls dont waste your precious time….

I got the formulla…..

=IF(E50,E7*(E6/12)*((1+(E6/12))^E5)/((1+(E6/12))^E5 -1),””)

where E5- tenure (12*20 yrs = 240)

E6 – Rate of Int – 12%

E7 – Loan Amt – 94 Lacs

Its like this, First you calculate EMI using the formula, then that is fixed for whole tenure. NOw each month you calculate the interest by Interest rate * Loan outstanding for the month. then whatever remains if the principle amount

Hi,

I have taken a loan of 20Lakhs for 20 years tenure(@10.95% fixed rate for 10 years) . As suggested by you i made a recurring deposit and made a prepayment of 2.5lakhs at 7 th month. I pay around 20K EMI. Imagine if i reduce my EMI by 5000(Possible in LIC) and pay them at the end of every year as Pre payment will that be fruitful. Also i am not able to find a EMI calculator which will show the impact if i reduce my EMI. Please help.

the more you prepay, the better it is for sure ! .. So keep prepaying wherever possible , look at this calculator which you asked for – https://www.jagoinvestor.com/2011/04/loan-amortization-emi.html#.UoIWxPmqkxE

Hi Manish/Ashal,

I have a query – on what balance is the monthly interest computed?

For eg: if, on the 1st of the month, total outstanding = 8,50,000/- and my EMI (say 25,000) is paid on 10th of the month, the interest debited on the 31st of the month – will it be calculated –

> on the balance at the beginning of the month (i.e. 8,50,000) or

> on the balance at the end of the month (i.e. 8,50,000 – 25,000 = 8,25,000) or

> on day-wise balance, i.e. 8,50,000 for the 1st 10 days and 8,25,000 for the remaining 20 days?

Could you let me know?

It will be last outstanding balance. A outstanding balance will be changed the moment you pay your EMI . Out of your EMI , the principle part will be deducted from last outstanding balance, and then it would become the new outstanding balance .. think of it as variables used in programming and you will understand what I am saying !

Thanks for the prompt reply, Manish. So that in effect means the 2nd option. Also, do you think it would be beneficial to pay the EMI towards the end of the month – say 25-27th of the month? That way, I’d earn interest from SB for the amount, at the same time, the reduction in outstanding balance for the loan wouldn’t be altered. Is that right?

Correct ! . it would be good option !

Thanks a ton Manish.

Hello Manish Sir!

Hhve home loan Rs 27,51,000 @11% wef 10 Jan 2008. Did prepayment thrice. Currently, Loan balance is @9,30,000@11.90%, EMI 20000,

(principle -1,05,719 interest Rs. 1,27,741) X 64 months. Whats the best option for me, in case wants to have the max benefit of interest component of loan. To reduce tenure or to increase EMI. Planning for 1 lakh prepayment. Thanks n Regards…

BEtter Reduce the Tenure , NOT EMI

Thank you.

I hope it fulfills my desire of having the maximum rebate on the interest component of home loan, apart from reducing the burden.

Regards.

Hi Manish,

Thanks a lot for this excellent resource you have created for the benefit of all. I am going to be home loan shopping very soon and was trying to understand this business. This website and all the collection of resources you have here have helped me a lot in my understanding of how home loans work and how the banks are going about this business. Keep up the good work. You are really creating an awakening among people!

Thanks Tushar

Two more resources I can recommened are my 2nd book – bit.ly/Financial-planner-book (there is a chapter on debt repayment)

And also indianrealestateforum.com . Its the powerhouse of articles and ideas on real estate !

I want to know that suppose if I have a loan of Rs 10 lacs with an emi of 20,000 and If I make a part payment of Rs 1.00 lac out of the EMI what would be the better option should I go for increase in EMI or decrease the tenure of loan. Please clarify.

Better decrease the tenure !

Hi,

We are planning to buy an appartment costing around 60L (incl reg+taxes). About 25L would be funded from my famaily and relatives and rest i.e. 35L will be loan from LIC at 10.25% RIO. However we have loan eligibility of 40L, should I go for max bank loan and save the family fund or utilise the family fund and lesser bank loan? Please suggest me on the same and appreciate any other suggestions on this regard. thanks

If you have the capability to repay the loan faster, then I would suggest for higher loan , the money you have can either be kept as reserve for 1 yr of expenses !

I have taken the loan in 21-09-2012 from DHFL of worth Rs. 2280212 with the interest is 11.5% for tenture 20 Years. DHFL had paid the 1530212 to builder and took the PEMI (interest only) of worth Rs.14665 up to Mar-2013. In Mar – 2013 another disbursement has been happened of Rs 500000 and Now combined amount for builder to paid is Rs. 2030212 and they have taken Rs. 19456 of PEMI interest up to May 2013. In June 2013 they have been started the EMI Rs.24330 on actual Loan amount i.e. 2280212 and given the Principle for extra amount I paid i.e. 4874. I am not getting Possession till now and Loan balance still remain for Rs. 250000 from DHFL, but EMI is started from June 2013. Could You please tell me that How principle will be adjusted if full payment is done from DHFL to builder after getting possession.

Please raise this in our forum as its needs extensive discussion – http://www.jagoinvestor.com/forum/

Hi Manish,

I have a housing loan account with SBI for 27 lakhs floating. Rate of interest currently is 10.2% and tenure is 25 years. I am also using the maxgain account. I wanted to know how is the interest calculated. Is it calculated on a monthly basis or is it calculated on daily balances like a credit card? If interest is to be deducted on the last day of the month, is it enough to have money transferred to maxgain account only on the day of the calculation or is it better to keep all my salary there for the whole month to increase the principal deduction?

check this https://www.jagoinvestor.com/2013/05/sbi-maxgain-home-loan-review.html

Thanks Manish for your reply. What I understand is that it is better to have the balance throughout the month in my OD account instead of one day.

Yes. if its possible for you

Hi manish ,

I am planning to take 45Lkh loan from HDFC

I am planing to take 30 lakh as floating (10.15 for 20 years) and 15lakh ( 20 years ) which is fixed for 10 years at 11%. as I wanted to to mitigate risk on floating portion of it and also I plan to repay some part with EMI chunks. What do u suggest.

Amol

Amol

Kindly open a thread to discuss it here – http://www.jagoinvestor.com/forum/

Dear Manish,

I have taken an home loan of Rs.13.28 lakhs from SBI in year 2013.

for 10 year period.

I had planned to repay loan in 24 month period duration.

Is it advisable to do so. if not what should be the ideal duration for repayment if extra amount is available.

I have already paid extra amount more than the EMI amount for first two months.

Pl advice

Thanks

Yes you can do that .. just see if you want to let go the home loan tax deductions !

Hello Manish Chauhan,

You wrote a great article.

I have one question, recently I took a loan of 27 Lacs for 20 years.

My

Month EMI Interest Principal

1. Rs. 26055 Rs. 22500 Rs. 3555.59

2. Rs. 26055 Rs. 22470 Rs. 3585.22

…

…

12 Rs. 26055 Rs.22160 Rs. 3895.44

If suppose every month, I am paying Rs. 20,000 (20k) then in one year I will pay 20, 000*12 = Rs. 2, 40,000. Here, the question is after paying Rs 20k per month my usual principal amount will deducted as per it is decided (with respect to 27 Lacs) or the new principal amount will get deducted,

Let say,

My Loan amount is 27 Lacs

1st month EMI = 26000 (principal = Rs. 3555)

And I am paying Rs. 20k more to my loan account.

So, the 2nd month EMI will be on 27Lacs – 3555 – 20,000 = Rs. 2676445.

So, the 2nd month EMI will be Rs.26000 or Rs.25862. So, the principal amount deduction will be Rs. 3585/- or Rs. 3555/-(New amount based on RS. 2676445)?

Please reply.

Yes , the next month outstanding amount will reduce by 20,000 more , so it will be 2676445. , but the EMI will be same , but your tenure will come down .. note that EMI’s are constant , only tenure keeps up and down

Manish, I usually do not leave any comments on net. But after reading this article, I really felt to thank you. Article is excellent and is beneficial to many investors. It saves many peoples money who does not know about how the loan magic ( simple maths ofcourse 🙂 )works. I have made my plans on how to re-pay the principle amount after reading this article. God bless you.

Srilakshmi

Good to hear that Srilakshmi

Keep commenting once in a while and ask your doubts and leave your opinion , the blog is yours , not mine 🙂

hi Manish:

Thanks for this one : I am specifically looking at one in which say I increase the emi from x to x + 10k, or made some prepayments during the tenure, how would my tenure vary ? Do you have any excel for that ?? Please let me know

thanks

Kalyani

There are some of the calculators given at the end of this article, just take of them which gives you the full schedule of the EMI for each month .. Then for the month from where you want to prepay the amount , just decrease the OUTSTANDING AMOUNT by that much, and you will see that the outstanding amount will go ZERO at some point , see how much is it reduced .

Manish

This was an excellent place to get very valuable information. Thanks to all of you. I am starting my home loan shortly and this helped a lot. @Manish you loan amortization calculator has actually given me a clear view on how I can close my loan within 15 years rather than 20 years. I ll try to reduce it further by 2-3 years through prepayment as and when possible. Appreciate everyones contribution on this page.

Yes .. glad to know that you got some value out of it .. We have much more at our wealth club incase you want to become a member – jiwealthclub.com

Hi,

Please help me , I have taken loan 38,00,000 lakh from LICHFL for 10 years in April-2011 and interest is fixed for 5 years 10.15 % . I have paid Pre-EMI for 1 year 2011-2012 and from Augest 2012 I started paying EMI 54,910k per month. Now when I took Report from LIC it gave me certificate for 01/04/2012 to 30/3/2013 that

Total Principle : 2,19,576 Total Interest : 2,65,269

I started paying actual EMI from Aug-2012 per month 54,910 and when i am trying to calculate Principle and Interest part then EMI i am paying in Aug-2012 to Mar-2013 is not matching with the toatat amount paid.

Please tell me how i should calculate what is happening here i am not able to understand. when i am paying 54,910 for 8 months and as per statement my Principle is deducted 41101.30 and interest 13808 rs in Aug-2012 when actual EMI started , i am not at all able to figure out calculation. please help

Hi Manish,

I have a doubt about assignment deal for purchasing a ready-to-occupy home. An investor bought this property and is now willing to sell it but he has not done registration of his property and has also availed a loan on this property from Corporation bank. And the builder is the main party in this deal when we register the property in our name and investor ( flat owner ) will merely be a consenting witness. But the problem is that SBI doesnt give loan on 2nd agreement ( between us and builder ), instead gives 80% loan on 1st agreement ( which is between current flat owner and builder ). So we are planning to go for loan from HDFC but we are not sure if everything will be clean or not if we do so or will we be forced to take loan from Corporation bank only despite higher interest rate. Because usually the bank will disburse loan on the registration day so we dont know how the 1st buyer got his loan without registering the property. Any help/advice will be really appreciated. Thanks..

Anu

This needs more people to comment who really have seen this – ask it on our forum please – https://www.jagoinvestor.com/forum/

Dear Manish,

Nice blog. I regularly visit your blog and brush up my knowledge on different aspects of investing.

I have one doubt, hope you can point out the solution.

I have taken a loan of 21L from Axis Bank and as i understand from the Excel sheet if i do the repayment then Principle will be reduced and hence lesser will be the interest which i will pay. I just want to know is there any limit on Prepayment which i can do with respect to time? Or we have to pay some charges also if we do bulk prepayment to reduce the EMI load?

Also, if i want to reduce the tenure of my loan (and increase EMI) is it possible by requesting bank? Is there any charges involved?

Guess i’m able to explain my query correctly.

Thanks,

Chandan.

How much you can prepay is defined in your agreement with bank . At times banks put a minimum and maximum limit, like minimum 3 months of EMI , not less than that … just an example .

Yes, you can talk to bank on reducing the tenure , but when you make prepayment, anywyas your tenure will come down !

Ok,

Thanks for you reply. BTW, Is this max. and min. vary from loan to loan or bank to bank. Any insight would be really helpful.

Thanks,

Chandan.

That was just an example. look into your agreement !

Chandan,

I also have a home loan with axis. There are no prepayment/foreclosure charges now (as per rbi’s mandate). I would suggest you to just try repaying as much as you want. I don’t think they will reject your repayment (they have a loan pool account to which you can transfer your repayment amount).

HTH.

Hi Manish,

we had taken housing loan in year 2005 june for 7400000 from hsbc bank and the rate of intrest was 7 % when we took loan and we have paid still now 7850000 and the principal outsatding is 6800000 and rate intrest now is 14 % dont know what to do . if we want to close the loan they are charging 2%

You are stating facts , What exactly is the question !

Hi Manish,

Thanks for the loan amortization calculator. it has helped to plan out priorities given that kids are coming to pre-university shortly.

regards, Pavan

good to hear that Pavan

Hi Manish

Thanks for sharing such useful information here.

Can you suggest me the better prepayment option for an outstanding loan of Rs.15 lakh as on date for 15 years. Is it better to prepay 1 lakh right now or increase my EMI by Rs.1000 p.m.?

Do the maximum , Prepay 100000 and aslo prepay EMI by 1k more each month is possible .

Hi Manish,

Its very nice article. I also have same problem. I hv a home loan in IDBI….30L for 20 yrs and 11.25% interest. From past one month just 30000 principal has been paid and around 3,50,000 interest.

The problem is I cannot pre pay some bulk amount every year. How to reduce this interest amount. Every month its going to the interest itself.

Please help.

Regards,

Dwaraka

Dwarka

It works like this only . One thing you can do is that reduce your tenure by 5 yrs , your EMI will increase but a very little amount which I am sure you can afford.

Hello Manish,

I have been through all the posts and these are amazing. I am not expert in this area and take extra time to understand things. I have couple of questions but let me explain my condition first.

Last month only I availed a home loan (to construct) for 10 lacs for 10 yrs @ 10.50% interest rate. I got my first installment of 2 and half lacs and will be getting same installment after some period lets say 6 months (fixed tenure). Now questions are :

1. How bank will calculate the interest? (I mean for 10 lacs or for 2 and half lacs for first six months and then)

2. If I am going to pay 30k every month how soon i can close tht loan.

3. for tax benefits I got to know that i can claim after comletion of my construction only. Is it true?

I am just starting this process so your suggestion will be really great full. Do let me know if you need additional information.

Thanks

Vidya

Vidya

Yes you will be able to claim the tax exemptions , only once you get the possession of house. Read this for more on this – https://www.jagoinvestor.com/2011/02/4-home-loan-facts.html

Coming to your questions . All your queries will be automatically answered if you go through these

https://www.jagoinvestor.com/2011/04/loan-amortization-emi.html , look at the amortization table given at the end

Manish

Thanks Manish

Sir,

i want ask you, if i start construction with my own money around 20 lcs there will be any tax pay or if i take loan from bank is there any benefit

Regards

Balu

You get benefit only if you take a loan , else not

Hi Maneesh,

I read your article & I feel cery blessed to have such positive discussion on net.I am 0 on calculating emi but from your discussions I am able to manage some of my financial calculations.

Navneet Singh

Good to hear that 🙂

Hi manish,

I like your post on home loan very much. Thanks for your effort.

Recently I have applied for home loan from Idbi for Rs 2220000. My loan reimbursement will continue for one year and only after that my emi will start till then I will have to pay interest on the part of the loan disbursed. My question is- is it possible to start emi early i.e. as soon as bank starts disbursing loan so that I could reduce principal by some extent.

Also I am planning to prepay Rs 10000 every quarter to reduce my principal. So should I increase my emi every year or prepay as mentioned above, which will be more beneficial?

Please advice.

Deepak Choudhary

No Deepak

What you have is called as Pre-EMI loan .

Hi manish,

I like your post on home loan very much. Thanks for your effort.

Recently I have applied for home loan from Idbi for Rs 2220000. My loan reimbursement will continue for one year and only after that my emi will start till then I will have to pay interest on the part of the loan disbursed. My question is- is it possible to start emi early i.e. as soon as bank starts disbursing loan so that I could reduce principal by some extent.

Also I am planning to prepay Rs 10000 every quarter to reduce my principal. So should I increase my emi every year or prepay as mentioned above, which will be more beneficial?

Please reply.

Deepak Choudhary

Deepak

I dont think you can start the EMI earliar , Should you prepay each month to clear off the loan at earliest !

Hi Deepak, Manish,

You can start paying your Full EMI from the month first disbursement is done. I am doing it with HDFC. The advantage is huge, as interest is calculated only on the amount disbursed till date and rest of the amount out of EMI goes towards the principal repayment.

Essentially, it reduces your principal amount drastically by the time construction is complete and full amount is disbursed. Say, if total duration of loan was 10 years, paying the full amount from beginning will close the loan in total 9 years (1 year before construction + 8 years afterwards). More is the construction time, more benefit you get, as more of the money would have been paid towards the principal.

Sushant

May be you want to explain us this concept , I am still not clear, can you start with a proper example and explaination with comparision

Manish,

Below link has the explanation of the concept behind it and comparison with regular Pre-EMI option –

http://capitalmind.in/2011/05/pay-pre-emi-or-full-emi-the-facts-revealed/

However it does not provide the full detail of calculation. If you wish to have the exact details of calculations, I would be more than happy to prepare an excel sheet and send you over the weekend. This text box does not have provision for image or spreadsheet posting. You can post the sheet’s information in your way(image/graph) over the forum once we are in the same plane of understanding over the topic.

I have learnt a lot from this forum and it’s time I can help others .

Yes , why dont you send a excel sheet which explains the concept !

Hi Manish,

Could you send me your email-id please. I am done with the sheet and can send you.

Regards,

Sushant

Hi,

I have gone through this website and there is so much useful information that people should know before going for housing loan. I will have a doubt on my housing loan. please clarify.

I have applied for a housing loan of 18000 for the tenture of 20 yrs, from SBI. As per some scheme first year interest is 8% and 2nd nd 3rd years is 9%. The bank calculated the EMI as 16520 and my EMI has started on Jan 2011. The thing here is even though I have applied for 18L, I have taken only 15L ( 14,93,750/- exactly) from the bank, but the bank is deducting the EMI(16520), which is calculated on 18L.

As of now I have paid 17 EMI ( 280840) and my outstanding amount has come down to 13,67,333. To my knowledge without my knowledge I am paying some extra principal amount every month. Now If I wanted to prepay 3L to the bank, which would be better in the following options.

1. Keeping the same EMI, making tenture less

2. Less EMI for the tenture of 20 years.

When I asked people, I was told that OPTION 1 is always bettter. But I go with 2nd option, what will be the difference of amount, I wuld by paying to the bank?

Please let me know how to calculate this?

Prasad

You should go with option 1 and as your bank is SBI , i would suggest using RTI for this questions .. you will get proper results .

Hi Prasad,

Always 1 option is the best.i explain taking my own example.

Iam paying 30220 INR to IDBI as my home loan repayment EMI

for an year iam paying 30220 x 12 = 3,62,640 INR (principal + Interest)

I recenty prepaid 2 Lakhs and the bank reduced 3 years in my term hence i saved 3,62,640 X 3 = 10,87,920 INR.

If i had consided the option 2 i would had reduced a mere 1000 per EMI of 30220.

option 1 in other words means you are prepaying the principal amount and that will reduce the interest component in the EMI hence you save..

Hi Manish,

I have one question. My home loan has just started. Please find details below:

Loan Amount: 2500000

Loan Interest: 10.5%

EMI : 27635

I am going onsite soon and I might have extra money to pay my home loan. I am planning that I will pay Rs50000 every month extra. What do you suggest. Should I pay 3L to 4L every 4-5 months or should I pay every month.

Is there any calculator which can tell what part payment will be better.

regards,

Nitin Bansal

You should prepay each month .. That will bring down your tenure like anything

Hi,

I keep repaying for my home loan of 20 yrs. My target is to close the home loan in next 5 years. Usually I keep lowering my EMI amount whenever I repay or there is a reduction in the interest. In your opinion what could be better option – reduction in EMI or reduction in tenure, If I want to pay less total interest in the span of 5 years (I am damn sure that I would close my home loan in 5 years :)).

Or does it matter reduction in EMI or Tenure in terms of total interest paid in 5 years.

– Sudeep jain

Better reduce your tenure .. that is much better from total interest payment point of view .

We taken loan 300000/- in 2004 -05 & EMI started with Rs. 3640/- from ICICI Home Loan. Now they r charging interest @15.75%pa which was earlier at the time of sanction of loan was floating rate 7.5%pa . Now we come to know that it is not as per RBI norms. What action we should take? If there is no remedy then suggest another option to re-loan.

Ashok

as for the explaination from ICICI BANK , get it in written and still if you feel its not as per rule , file a case and complaint with RBI and banking ombudsman

Hi Manish,

I have taken a home loan of 20 lacs for 15 years @10.5% from HDFC. EMI is deducted from my acc on 4th of every month. I would like to make a prepayment of around 5 lacs this month. My question is: would it make any difference if I prepay on 5th or 25th of this month?

Thanks

Ankur

I think once you make the payment on 25th , your outstanding will do down and the new balance will be considered for EMI interest calcualtion , but if you do it on 5th , it depends which one is considered first , EMI payment or Prepayment .

I suggest you clarify it on our forum : https://www.jagoinvestor.com/forum

Hi Manish,

Is there any concept of variable EMI?

Suppose my EMI for some loan is 20k, so can I pay 30k for any particular month?

If not, can we decrease the duration for loan repayment, i.e. increasing EMI thereafter??

Thanks in advance!!!

-Vivek Kumar

Vivek

I know dont if there is anything like this , but you can also prepay a loan to certain extent each month, so you can make 10k additional payment for your loan each month when you have the money

Thanks for reply!!!

So, this means that EMI is the minimum amt. to be paid each month.

We can pay any extra amt. over EMI, if i hav money, to reduce the loan duration as well as interest.

Am i right??

-Vivek

Yes , thats correct

Hi Manish,

I have read in today ‘s TOI that you can get the rebate on purchase of your second house for Interest amount(not on principle amount).Please clarify this in details.

Will this me to reduce the burden on my Income tax & also have investment as an asset

Yes , thats true .. you can claim the full interest paid on your second home loan , without any limit

hi manish

very nice article

my question is

i have purchased a under construction property the contractor is asking for the documents for loan case & the EMI will be started after 12months i.e. after i get the possession of the house.

1. is it good option to start paying EMI from the start of loan disbursing to the contractor.

2.if i want to pay some amount which i have in savings to the contractor & reduce my loan amount is it good option

Sachin

Its always better to pre-pay the loan incase you have some money in your side ..

Thanx for your reply

but can i start EMI imidiately after disbursing the money to the contractor.

& also paying money directly to the contractor will creat any problem in future.

Sachin

If loan is given by bank , then pay the EMI to bank only directly, why to builder ? And when does EMI start will be mentioned in your loan agreement , read it

Pls see the calculation of sbi on the rate 8.5%, my question is why the interest amount is increasing and decreasing though the rate of interest is fixed for the period

debit credit

.31-Mar-2012 (31-Mar-2012) 9,908.00

29-Mar-2012 (29-Mar-2012) 12,490.00

29-Feb-2012 (29-Feb-2012) 9,295.00

29-Feb-2012 (29-Feb-2012) 12,490.00

31-Jan-2012 (31-Jan-2012) 9,949.00

29-Jan-2012 (29-Jan-2012) 12,490.00

31-Dec-2011 (31-Dec-2011) 9,967.00

29-Dec-2011 (29-Dec-2011) 12,490.00

30-Nov-2011 (30-Nov-2011) 9,668.00

29-Nov-2011 (29-Nov-2011) 12,490.00

Lovely

Interest amount will obviously be increasing/decreasing because its calculated on monthly reducing balance . as you pay the EMI each month , the interest part changes

but as principal amount is decreasing and rate of interest is same so it should decrease only

that must be because of the floating interest rates which increased !

Dear Lovely John, The difference is due to the no. of days in the each month. Nov. was 30 days, Dec, 31…. Feb 29……

Also after each month as principal amount is being repaid a bit, your next month’s interest ‘ll come down a bit also.

Thanks

Ashal

Dear Lovely John, please look in to your DATA again, Dec, Jan, & March 3 months are of 31 days & from your own data, the interest charged for you was 9967, 9949, 9908 Rs. in that order, is it not decreasing with every month?

Thanks

Ashal

Dear Manish, Appreciate your help and the service you do. Your article, response and the tools provided to calculate are very professional and very useful. Continue this service to us.

Good to hear it was of help Haribhaskar !

The above loan is repayable in Equated Monthly Installments (EMIs) comprising of principal and interest. The total

amount of EMIs payable from 01/04/2011 to 31/03/2012 is Rs. 203143. The breakup of this amount into principal and

interest is as follows :-

Principal Component Rs. 14032.00

Interest Component Rs. 189111.00

Balance Outstanding as on 27-DEC-11 : Rs. 1735459.00

As you are suggesting for part payment.How part payment of loan is good according to you?

Dear Bipin, the part prepayment made by you for the loan, ‘ll be adjusted directly to the outstanding loan amount & hence the loan amount ‘ll come down immediately. For example if you are making a part prepayment of 3L Rs., your outstanding loan amount ‘ll come down to 1435459. So from next months for the same EMI, your interest outgo ‘ll reduce & the principal component in your EMI ‘ll increase. This ‘ll again help to close the loan early & thus saving the interest paid on your home loan.

Thanks

Ashal

thanks for your input, but there one more catch here… it is not adviced to reduce tenure but rather reduce the EMI. In that way to dont keep ur partpayment money ideal till the end of tenure

Dear Bipin, I’m sorry but I could not understand your reply. Can you elaborate it?

Thanks

Ashal

Hey mohit this is stanley and i work in a BPO and i get paid 19k and i had purchased a flat in the year 2010 for 9 lacs i was 21 then,i took a loan of 750000 at the interest rate of 9.75% in a fluctuating basis and now as on 24th march 2012 the interest rate is 11.75% … i got my bank loan statement and i saw that my outstanding amount and it is 740847 as on 31st march 2012.. i want to finish up my loan as soon as possible.. coz i am the only one earning in my family so i have to look up for my savings also … i dont know anything abt these housing loan policies and stuffs so i keep looking for some articles like this … so please suggest me how to plan about to repay my loan .. plz do reply

Stanley .. “How to pay” ? What exactly do you expect in this ? No magic can happen , keep paying and prepaying from time to time, unless you increase your EMI , you will end up paying till end, make sure you keep prepaying the extra amount whenever you keep getting the money from here and there !

Hi Manish,

I have a home loan for 23.5 Lakh for 20yrs tenure from LIC, which started Jan’2012. The EMI is Rs.24,500/-.

1. I want to pre pay principal of 5Lakhs. And I want to buy a plot for 25Lakhs on loan. Is it better to prepay the principal or invest as a margin money to buy the plot. please advice.

2. Is it better to pay Rs.25,000/- more as prepayment of principal every month? or is better to reduce the tenure of the new plot loan? one more thing I may not get the 20Lakhs without large tenure. Please suggest.

Bhaskar

1. Prepaying will mean that the tenure is reduced because in most cases EMI are not reduced, its the tenure . so the cash flow will remain same for several years.

2. Yes it would be good to prepay some amount each month .

Dear all

Thankx for quick response. I repeat what I have attempted. For a loan of Rs.22 lakh @ 10.5% roi with 5 year tenor with daily reducing balance on a monthly rests basis as I presume for SBI, i caliculated full interest for the first month and for second and subsequent months i reduced the principal component of the EMI (assumed EMI at Rs.50000) from the loan outstanding thus from very second month onwards the interest comes down because the principal outstanding is less by the amount of principal component in the previous month EMI. In case of ICICI, i reduced the principal repaid in the previous year on annual basis and arrived at the interest portion of the EMI each year. Thus i got a difference of about Rs.1.34 lakh between the monthly rests of SBI and annual rests of ICICI. Am i correct. pl enlighten. thanks

Dear Rmohan, now I can understand. You are using annual reduction for ICICI Bank loan. My dear friend, you are wrong, even ICICI bank also now a days use mly reducing for calculation of Interest & principal from EMI.

Thanks

Ashal

Dear Manish

Very enlightening articles and discussions. I want one clarification. SBI is offering daily reducing balance . I understand that EMI remains the same, but interest portion gets reduced from the second month on the principal component repaid in the first month and so on in the subsequent months. On account of this the interest burden on a 5 year tenure loan of Rs.22 lakh @10.5% comes down by about Rs.1.34 lakh as compared the interest charged by ICICI for the same loan, roi and tenor. I had reduced the mothly principal portion and worked out the interest component which is less in cawe of SBI and constant in case of ICICI. pl enlighten all those loan seekers on this aspects. thanx

Mohan

Your question is very unclear to me , Please repharse it in proper manner again . Also in daily reducing balance , the interest changes every day .

Dear Mohan Rao, in case of SBI, it ‘ll charge you the interest for the no. of days for each of the month say 28-29 for Feb, 30 for April, June…., 31 for Jan, Mar….

Where as ICICI, ‘ll charge interest on a fixed pattern of EMI to EMI date counting 1 month.

That’s where the difference occurs but I’m unable to understand that it ‘ll generate such a huge difference of 1.34L Rs. in 5Y term.

Please share your finding in detail if possible.

Thanks

Ashal

Hi Manish,

Suppose I take a loan of 1000000 at 10% for 10 years. Now my understanding is bank will calculate the interest for 10 years and add that to the principal amount and divide it by 120 months for the EMI. In this case the EMI should be 16,666 but through your calculator it is 13215 so obvisiouly I am wrong so kindly let me know how the EMI is calculated.

Another question is suppose I prepaid my loan after 5 years in that case my pending amount is 621971.83 as per the EMI calculator. But shouldn’t the amount be reduce by the extra interest I paid in the first 5 years. The interest I was paying for the first 5 years was on the assumption that I have kept the 1000000 for 10 years but actually I loaned that amount only for 5 years now.

Thanks,

Devneder Singh

Devendra

NO , EMI formula is different , the way you are calculating is not how it works See this : https://www.jagoinvestor.com/2008/01/how-home-loan-emi-is-calculated.html

Also when you prepay the loan at that time there is a LOAN OUTSTANDING Amount and thats what you have to pay . Each time you pay the EMI , some part of it goes to main principle and your main loan gets deducted by that amount only

very nice article. it open my eyes …now i understand why bank agent insists for 20 yr tenure, they talk very clearway about ..you have to pay less EMI , Excellent Article.

Good to know that Sneha that you are very much clear now ! . Take action now !

if have taken home loan of 9 lakhs for 20 years on floating interest.

i have plans of paying off my loan in 2 years time.

Should i go for higher tenure ie 20 years tenure or short tenure?

Laksha

You can pay off the loan if you want, but there are benefits like tax deducations etc which you can take . Dont you want to take those ?

Dear Priyanka, as you have already paid back more than 50% of your loan amount till date, there is no benefit for asking – opting 20Y of loan term was a right decision?

From your query, it seems you have both – lump sum surplus amount to pay back your home loan as well as mly cash flow to pay higher EMIs.

In my opinion, please pay 60% & at the same time increase your regular EMI from current level to a higher level as per your own cash flow position.

Thanks

Ashal

Hi Manish,

i have taken home loan of 9 lakhs for 20 years in aug 2010 on floating interest.

i have done part payment of 5 lakhs so far and wanted to know that it was correct to select 20 years tenure if i am paying off my loan in 2 years time.

everytime i paid part payment, i had requested for tenure change…was that decison correct?

my bank allows me to pay 60% of the o/s in one financial year. so should i pay off the complete loan even if the bank charges me extra or should i continue to pay only 60% of the o/s every year?

Priyanka

Priyanka

Ashal has replied you

—

Dear Priyanka, as you have already paid back more than 50% of your loan amount till date, there is no benefit for asking – opting 20Y of loan term was a right decision?

From your query, it seems you have both – lump sum surplus amount to pay back your home loan as well as mly cash flow to pay higher EMIs.

In my opinion, please pay 60% & at the same time increase your regular EMI from current level to a higher level as per your own cash flow position.

Thanks

Ashal

—

Dear Sir,

I have a Housing Loan from Union Bank of India @8.5% Internet P.A. but the bank transfer the amount in Installments then plz tell me how i calculate the Internet & the Interest was calculating in Floating rates.

regards

Rakesh

Dear Rakesh Agarwal, you need not to calculate any interest. Simply ask your branch to provide the loan statement & you ‘ll get the break up of interest & principal paid by you till date.

Thanks

Ashal

Rakesh

You dont need to do it yourself , ask your bank to give a statement for principle and interest .

Hi Manish,

I am planning to take a house(Apartment) loan of 30 Lakhs from LIC. Would you please suggest me to take 10.4% floating interest OR 10.7 % fixed for 3 years OR 11.15% fixed for 5 years. I am in confusion which option I should opt to get the benefit out of it. The above option LIC is having currently. IF you have some more suggestion its allways welcome. Next thing I would like to close this house loan as quick as possible may be within 5-6 years Maximum.

Regards

Ranjan

Ranjan

This decision cant be taken by anyone else . There is always a risk in any decision , If you go with fixed option, the risk is that interest rates dont increase and your choice is a wasted one. The risk in taking floating one is that interest rate go wild , so what matters most to you , security of interst rates or freedom . Choose as per your decision !

Dear Ranjan, out of the 3 options you have with you, please opt for the one which is more likely scenario from here on wards for next 3-5 years. As rightly pointed out by dear Manish, only you can make a call for yourself, what’s important to you? If you anticipate that from current level, Interest rate may go down, opt 10.4% rate. If you think rate ‘ll remain as it is or may increase a bit opt 10.7%. If you think rate may increase in a big way from here, opt for 11.5%.

Thanks

Ashal

Hi,

I have taken home laon from HDFC in 2010.

Amt. 13,00,000/-

ROI -8.25 % upto 31-03-2012 & After That normal ROI that in market

Tenure–Original 20 Years ,Which i Reduce to 15 Years

Currently I am paying Rs.12,383/- as my EMI upto 31-03-2012. After that I came to know that my ROI will be 11.5% means 15,600/- as EMI after march 2012

Please tell me what is better option for me

(1) To reduce Tenure to 10 years

(2) To add the amt. in prnicipal (Partial paymet)

Your question is not clear .. rephrase it !

What is best option for 13 lakh home laon @ 15 years tenure. (ROI 11.5%)

Either pay more amount in principal or reduce tenure.?

Dear Manmohansinh, any amount paid as prepayment apart from your regular EMI’ll be directed adjusted from your outstanding loan amount & it ‘ll ultimately lead to reduction of term of your loan automatically.

So, in my view, if you do have mly cash flow to handle extra EMI, increase your regular EMI & at the same time, prepay a part of your loan.

Thanks

Ashal

Hi Ashal,

I need some more clarification on your reply.

“So, in my view, if you do have mly cash flow to handle extra EMI, increase your regular EMI & at the same time, prepay a part of your loan.”

In the above case I could think three option:

1. Should I keep the same EMI and rest of savings I can pay as part payment.

2. Should I increase the EMI and Dont do any Part payment.

3. Should I increase the EMI and do partpayment whatever possible from the saving

Please take a look at it and let me know your thought about it.

Regards

Ranjan

Ranjan

I think prepaying the home loan each month with extra cash would be better !

Dear Manish,

Thanks a lot for a lot of information. I have a question here.

Consider I have taken a home loan for 15 years tenure and my EMI would be 40000/-. If I do this I will not be left with any additional money to pre-pay any amount towards principal and close it earlier. That means I will pay till 15 years.

Will it be better if I opt for 20/25 years instead of 15 year, so that my EMI amount will be less and I can save some money and pay towards principal once in a year or so, which will help me in closing the loan earlier than 15 years.

Regards

Ranjan

Dear Ranjan, what I mean – increase your EMI from current level to a higher one as per your cash flow position. At the same time, if you do have some money to prepay, use the same to bring down the loan liability immediately.

Thanks

Ashal

Hi Manish,

Your posts are really adding values. Thanks for that.

I would like to know, Can I take home loan from both bank and my parents for a single property? If yes what do I need to produce to my employer to avail tax exemptions for interest and principle paid for loan portion arranged from parents? Also, which method should be applied to distribute the principle and interest payment, if we agreed on X% of interest for showing during tax exemptions ?

Idea is to get maximum tax benefit, please suggest on choosing the tenures for both bank and parents loan. I am planning to arrange 40% from bank and 60% from parents for the total required loan amount.

– Arpit

Dear Arpit, In all probability, your employer ‘ll not entertain the private loan part i.e.e loan taken from your parents but you may claim it while filing your ITR.

You shouyld prepare a loan agreement between your parents & you mentioning the details like term of loan, quantum of loan, ROI to be paid, terms of repayment i.e. EMI or lump sum……………

Please make the loan agreement on stamp paper.

Thanks

Ashal

Arpit

How will taking a loan from two banks help ? Why do you want to do that ? Ultimately the total limit is 1 lac for 80C and 1.5 lacs for interest , it can be from 1 bank or 10 bank . that does not matter . I think it would be good idea to discuss this on our forum : http://www.jagoinvestor.com/forum

Hi Manish,

I am planning to take a home loan for ready to move Apartment. The apartment is got loan from LIC and the builder is also insisting to take it from LIC. Is it good to go with LIC or shall I opt any other. I have a plan of 30L loan. Do LIC charge on part payment in home loan.

Thx

Dear Rajan, I assume you mean LIC housing Finance. Well, it’s a good HFC & you may go with it. After NHB, guidelines no HFC can levy pre penalty charges. You are free to prepay as much amount as you wish.

Please go ahead & our best wishes in advance for your dream home.

thanks

Ashal

Thanks Ashal.

Dear Manish/Ashal,

I would like thank both of you for your time in replying to a lot of query which helps a lof of people around the world you cant imagine.

Loan Details:

LIC HFL

Loan amt: Rs 3244000/-

Interest rate : 10.7 fixed for 3 years

Loan term: 20 yrs

1st EMI : June 7th 2012

EMI amount( 32925/-)

Can you please clarify the below point.

I Would like to pay 1 lakh rupees as part prepayment in this March end.

Can you please tell me how much tenure will be reduced from 240 months.(Assuming EMI fixed amount).

Pls mention the calculation formula.

Thanks a Lot

Ranjan

Dear Ranjan, the term ‘ll come down by 21 months to 219 months if the ROI remains same. if it also comes down, the term ‘ll go down below 219 months, If it increases from here onwards, the term ‘ll go up again.

thanks

Ashal

Dear Ashal,

Thanks for the information. If you see my details, I have already paid 9 months (i.e paying from June 7th 2012). So by taking this updated info and considering from March onwards how much tenure will reduce. Can you please share how you arrive at the figure 21 months reduction.

Regards

Ranjan

Dear Ranjan, I calculated for exact details. So out of total 240 months, your term ‘ll be 219 months. As on date, you are already past 9 months, so your remaining term ‘ll be 210 months instead of 231 months in the original schedule.

Hope it clarifies your doubt.

Thanks

Ashal

Dear Ranjan, As you are already past 9 monthsd, your remaining term ‘ll be 210 months from here onwards.

Thanks

Ashal

Dear Ashal,

I am not clear how you have arrived at the figure 210. Please explain, I am poor in this field.

Total period in months = 240 months

Paid as of Feb 2012 = 9 months

Remaining Months to be paid = 231 (Assuming same contribution).

If I pay 1 Lakh additional towards principal in March then my tenure will be 210 months, means reduction of 21 months.

Please tell me this 21 months calculation.

Regards

Ranjan

Dear Ranjan, the 1L Rs. prepayment is the reason that your loan ‘ll be closed 21 months earlier. Actually due to this 1L Rs. prepayment, your EMI break up ‘ll change & a greater part ‘ll go towards principal & lesser part ‘ll go towards interest. That’s how your loan ‘ll be closed in 210 months from here onwards.

Sprite! Clear hai! 🙂

Thanks

Ashal

Some prepayment calculators are attached at the end of the article, use them to see when the loan finishes and how many months are saved ?

Close to 10-12 months will be reduced .

HI Manish,

Just would like to know how the calculation differs so much. As per Ashal it would reduce 21months but as per your calculation it would reduce only 10-12 months. Pls clarify how so much difference is there. I mean a difference of 9 months.

Thanks

Ranjan

Ranjan

19 months should be right then .. my answer was mostly a guess work based on numbers , better try those calculators which I mentioned and try them once.. unless you do it yourself, you should not believe me or ashal !

Dear Manish/Ashal,

I would like thank both of you for your time in replying to a lot of query which helps a lof of people around the world you cant imagine.

Wanted to share my experience in Home loan partpayment. Details:

LIC HFL

Loan amt: Rs 3244000/-

Interest rate : 10.7 fixed for 3 years

Loan term: 20 yrs

1st EMI : June 7th 2012

EMI amount( 32925/-)

I paid 1 lakh rupees as part prepayment in this May 2013. My tenure has been reduced exactly 20 months.

Your calculation is absolutely correct. Thanks a lot.

Regards

Ranjan

Great 🙂

Hi Manish/Ashal,

If I continue to Pay 1 lakh rupees part payment every year, how long it will take to close the loan.

Is it better to pay more part payment in the initial year or should be ok if I continue to pay 1 lakh part payment every year.

Regards

Ranjan

BEtter pay in intial year .. try out prepayment calculators we have given at the end of the article

Ranjan

All the companies have their own terms and conditions . I dont recommend you rely on anyone else info on this , but go through their brochure your self . Also discuss it on forum : jagoinvestor.com/forum

Hi Manish,

I have a query regarding RPLR spread.

I have a home loan with floating interest. My current RPLR spread is 5%. The financial organization is offering me 6%. In return i will have to pay conversion fees (0.5% of the outstanding principle)

In my case outstanding principle is 23.5 lac and 144 terms to pay. The fee is coming around Rs. 11750.

Is the deal good or bad?

Any suggestions?

Thanks

Dear Veerendra, yes the deal is good. Against this payment of 0.5% processing fee, you ‘ll be able to save a lot. How? I assumed your current applicable interest rate is 11.75% & you ‘ll get 10.75% as your new rate.

For the same EMI i.e. you are paying as of now, your tenure ‘ll come down from current 144 to 132. It’s a saving of 12 months or full 1Y. Multiply these 12 months to your actual EMI amount & you ‘ll be able to see the saving. Against this you w’d have to calculate the opportunity cost of that 11750 Rs. that you w’d pay as conversion fee. If you invest those 11750 Rs. @ 9% for next 12 years, your maturity amount ‘ll be around 34200 Rs.

So final take, go for conversion.

Thanks

Ashal

https://www.jagoinvestor.com/forum/ will give you better answer

Hi Manish,

I have a query regarding RPLR spread.

My loan is on floating interest rate. Currently RPLR spread for my home loan is 5%. The financial organization is offering 6%. In return they are asking for conversion fee (0.5% of outstanding principle).

My outstanding is approximately 23.5 Lacs and 144 EMIs left to pay. Conversion fee is coming around Rs 11750/-

Is this deal any good or bad?

any suggestions?

Thanks

Dear Manish

My age is 26 and i am planning to opt for a home loan of 16 lacs for a tenure of 20 years @ 10.75.I plan to pre-pay 2 lacs per year apart from the regular EMi’s till the loan closes since that’s the amount which i can easily afford.Now my query is that keeping in mind the figures that i have mentioned, for how many years would i need to pay the loan amount (EMi + pre-payment amt.) and how much total amount would i end up paying(EMi + pre-payment amt.)

kindly advise.

regards…Naveen Bhatt

Dear Neeraj, If you are paying 2L Rs. yly as part prepayment, within next 6-7 years you ‘ll be able to close your full loan.

Thanks

Ashal

Naveen

There is a calculator which you can use https://www.jagoinvestor.com/calculators/html/loan-amortization.html . This will give you some direction . Also forum is a better place to get more discussion on this : jagoinvestor.com/forum

Hi Manish,

Very nice article and all the suggestions mentioned here will definitely help me a lot to make a decision on taking home loan. I am almost finalizing a flat worth 37 lakhs. I am paying 20% and 80% as loan from a bank. Even though I have to yet finalize the bank. I am preferring SBI since I have my salaried account and seems they are also charging the same interest as other private banks and they have better prepay options than others. Suggest if anyother bank looks attractive at this moment. My take home is 75K, and I don’t have any other obligations except the monthly expenditure of 30K. So I am planning to take loan for a period of 15 years. In between probably I have to go to onsite where I can save some amount, which can be used as prepay. Please share your suggestions.

Basheer

Yea it will be a good option , considering your total EMI does not cross 50% or 40% of your take home , you can do ahead . Also see if you can go for 10 yr loan if possible for you .

Manish

Thanks Manish.

Dear Basheer, Please opt SBI’s Maxgain home loan for yourself. Please contact your branch for more details on the same. Go for around 28-29L Rs. loan amount & rest from your own pocket. For a 15Y period, the EMI ‘ll be around 31-32K Rs. Which is around 45% of your take home pay so not bad.

Thanks

Ashal

Thanks Ashal.

I was having home loan in ICICI and preclosed the loan on aug of 2011 – 12 finalcial year with the amount of 3.5 Lacs in 2 instalments. Can i get the Exemption on the amount paid againest intrestfor the period.

Dear Suresh, Yes you ‘ll get the benefit of the interest paid till the date of foreclosure of your loan, paid by you to ICICI Bank.

Thanks

Ashal

Dear Ashal,

Thanks for the information.

yes , but the limits will apply !

Well revisiting your comment #50, I think I still didn’t get that. If we are thinking in terms of “loan outstanding” then what is the advantage of pre-payment of loan?

Ankur

When you prepay , all your money goes towards PRINCIPAL AMount and your loan outstanding comes down , which means more principal payment and less interest compared to what you used to pay before the prepayment ..

What else did you expect from prepayment ? I am not clear why you dont think prepayment helps here ?

Probably I misunderstood your comment #50. Let me ask you when you say Loan outstanding, what does that mean –

Is Loan Outstanding = Remaining Principal OR

is Loan Outstanding = Remaining Principal + Remaining Interest?

Ankur

LO = Remaining Principle

Hi Manish,

That was a great post, opened my eyes on tenure part. We tend to take loans on higher tenure considering it will ease up our life but as you noted in comment #49-50 above, even if we’re pre-paying after 5 years bank will still charge interest for the rest years too! Common sense may say it is pre-posterous but on the other hand I do understand bank’s point of view too.

Here are some questions spinning inside me now-

1) Acc. to financial advisors, what percentage of our salary should constitute our EMI? (I understand it may vary acc to individuals, just asking an expert opinion)

2) Do you have an article on which banks rule the roost when it comes to customer choice, customer satisfaction, hassle free and yet are low on loan %age?

3) I am planning to take a joint loan for a house in my mother’s name? Do you have any general idea about the maximum age banks and HFCs allow for loan as a co-owner?

4) Do banks allow an increase in tenure mid-term? Example – Let’s say if I take a loan for 15 years tenure today and god-forbid after ‘n’ years I decide to extend that loan for 5 more years, do banks allow that?

Ankur

1. this has no standard answer , but I think it should not cross 40% of your take home , I say this considering that another 40% should be your house hold related expenses and then 20% of cushion should be there..

2. No we dont have that . but teh best way to find it out would start a thread on our forum : https://www.jagoinvestor.com/forum/ , see mouthshut.com also for this

3. No , again use https://www.jagoinvestor.com/forum/ and do your own finding , in such a big task and goal , never rely on other info , take pointer and then do your own findings

4. No I dont think thats allowed ,also the max term anyways is limited to 20 yrs ..

Manish

Hi Manish,

I have borrowed loan from IDBI bank for Rs. 2,476,540.00. Since I opted for under construction property I paid Pre-EMI of 134,560 plus total EMI which is (Rs.530,447 in Interest and Rs 119,770 in Principal). Now that I intend to close the account by paying the outstanding amount from own source, the bank is charging me the amount of Rs.25021 which they claim to be normal interest charged until the outstanding amount is realized.

My EMI hits 10th of every month and I plan to foreclose the loan account by 9th of coming month still the bank is charging with me the interest of ROI. So I eventually end up paying the interest even I am closing the loan account before my next EMI date.

I was never informed about this before and came to my surprise when I received the foreclosure letter mentioning about the amount to be paid as interest to the bank.

I believe this is clear cheating from the bank of such repute. Could you suggest what can be done in this case to avoid myself from paying the additional interest levied by the bank?

Thanks in advance!

Vidyanand Nayak

Vidyanand

Was it not mentioned in the contract done by you and bank , I doubt so .. it must be clearly mentioned in the contract , if its not , then bank cant do it , you can complain to RBI on this .

Manish

Hi Manish,

Thanks for your response. i believe all banks are charging the simple interest til date the outstanding amount is realised by the bank.

Checked with executive from multiple banks,even RBI does it.

Thanks for sharing the valuble info.

I have one question.

How do we calculate first month’s principle amount…

If you could reply to this mail.. it would be great

muniraj.shanthakumar@ness.com

Thanks in advance…

Use this calculator : https://www.jagoinvestor.com/calculators/html/emi-calculator-advanced.html

Hi Manish,

I am in confusion…i hope u wil clear that…..

I took a home loan of 25 lakhs at 13% interest and 20 years tenure. Its now a year.

As nw the market interest rates in other banks are less,i am planning to move to other bank.But here the Preclosure charges are 5%.

And i can prepay 1 lakh a year apart from EMI’s.

So my Confusion is that whether i should switch to other bank r stay in the same bank????

?:|

Thanks in advance

Gowtham

Even in other companies, the low interest rates are only for 1-2 yrs and then they all get changed to floating inteest rate and even their the same thing can happen , with 5% closure charges ,you will not really gain a lot , But what you can do is ask your bank about it and threathen them that you are planning to change your loan bank , and ask them to provide you same lower interest rate . generally banks do this at a cost , you will have to pay a small fees for this.

Manish

Thanks Manish…

Hi Manish,

I was reading your BLOG and its really fantastic and have lots of information.

I have taken a home loan of 20 lacs from SBI on OCT2010 for 20 years. Last Month I have done a part payment of 5 lacs. So the balance amount is somewhat close to 15 lacs.

Can you please suggest, if it is better to do some more part payments in the coming months (as I have some money) so that I can bring down the principal amount.

I was planning to pre-close the loan within this year.

Thanks in advance

-Ashish

Ashish

You can actually keep some part as loan as it gives your tax advantage . Why do you want to close the loan fully ? depends on the interest you are paying ..

The interest is first year 8% fixed and then two year 9% fixed and then floating. I just want to get rid of the Loan ASAP. I’m currently working at Onsite and hopefully will work here for another two years, so I will not be getting the TAX advantages. If you suggest then I can pre pay 60 – 70% of the loan amount by this year and rest of it I will keep it for the Tax advantages.

Ashish

Then if you have hte money , better prepay the loan .. once you come back , you can always buy another house and claim tax deductions

Manish

Hi Manish,

how to come up with a figure or potion of loan which can be kept for tax advantage,

Thanks,

Deepak

Deepak

Why do you need a formula for that .. do the maximum amount if you can , else do what amount you really have

Hi ,

If I want to buy a 2 BHK for Rs. 3364000, How much do you think I would be paying Downpayment? and also how much loan can I get if my AI is 8.4Lak / Annum

JJ

totally depends on banks , its generally 20% downpayment

Manish

Hi Manish,

Have been following your blog quite religiously for the past few days….its fantastic.

As others, I also have a home loan with ICICI of around 7 lacs which I took in 2007 for a period of 15 years on floating rate of interest, which has magically been changed to 40 years now. I have been paying my EMIs, currently the interest rate is 15% coming up with an EMI of Rs. 8753. I am planning to pay around 4 lacs of my loan as a part payment. What will be my balance loan amount once that amount of 4 lacs has been paid off and I keep the same EMI.

Thanks in advance.

Rahul

Rahul

Nothing has happened magically, Its just maths .. When interest rates go up , either your EMI has to increase or your Tenure , in most of the cases banks increase tenure, which goes up like anything if they have to keep up the same EMI , so thats the reason your tenure has gone up , dont worry a lot on this . You can prepay your loan for 4 lacs and then that amount will be deducted from your outstanding loan (assuming its 7 lacs right now) , so it will come down to 3 lacs , keeping your EMI as at amount ,your tenure will come down drastically .. and I would suggest better prepay this loan soon now ..

Manish

Thanks a lot for the response Manish.

ICICI is not accepting any online transaction for the part payment. As we do not live in India anymore, what is the next best option. ICICI has given us the option of Power of Attorney, but its quite a lengthy process. if there is nothing else, we will have to go ahead with this. How good is this option and how long does it take for them to accept and credit the cheque in our loan account?

Appreciate your time and response.

Regards

Rahul

Do one thing , trying adding your LOAN ACCOUNT NUMBER as third party into your internet banking account , and try to make a test payment of Rs 1000-2000 , Some guys told me that this way they can make the prepayment and it has worked for them , If this is successful , you can make the part payment using this method .

Otherwise , what else they expect ? Are they ok with you sending a cheuqe to them ? Or you need to be physically be there, in which case you might want to wait till your next trip to india.

One thing , try to threaten them that you are considering to shift your loan to other bank and this is because the prepayment is not getting accepted by them online , they might work out something !

Keep me updated

manish

Thanks Manish..

I am not really sure how to do the third party thing. I would try that if guided by you.

We did have a long discussion with ICICI the day before regarding our online prepayment. We did talk to the customer service department and the supervisor regarding the same. They were not able to give any other option to us than to visit India and pay the money or only through Power of attorney.

We requested them to transfer us to the branch from whom we have taken the loan (we were told we cannot talk to the branch) or to the person who is the decision maker (the manager or any other personal), they said they would contact us back but we havent heard anything from them yet.

I will try talking to them again and will use the loan transfer thing…lets see if we can convince them.

Will surely keep you posted…thanks a lot for your replies. I will wait for the guide about the third party account creation.

Thank you.

Rahul

Its extremelly easy process actually .. just like you add a third party bank account when you wnat to transfer the money to him , in the same way you can add your PPF account (confirmed , see this post : https://www.jagoinvestor.com/2011/12/ppf-account-online-investing-netbanking.html)

Now in the same way you can also add your LOAN ACCCOUNT NUMBER (unconfirmed , but some one told me this can be done) , so just put the nickname as “LOAN ACCOUNT” , put account number as your LOAN ACCOUNT NUMBER and then when it comes to choose the address , you can put the brach address from where you took that loan

Based on this try to atleast add the account , lets see if account addition helps ?

Manish

Hi Manish…

Nope it doesn’t let me add my loan account as a third party account 🙁 becoz it is from the same bank.

The only option I am left with is to call them and see if they can do anything for us (which I seriously doubt) else will go ahead with the POA option as I want to clear at least half of my loan at the earliest.

Thanks for your guidance…please keep up the good work through your blog.

I have done the similar way for SBI. In the last few months I have paid off a substantial chunk online without visiting the bank – in fact they themselves suggested this option. What Manish said should be possible with ICICI bank. It’s like setting up an account to which you transfer funds – lets say you send some money to your parents every month. You would have added their account in third party transfer section. Same applies to loan account. Hope this helps.

Manu…guess you were lucky to have had the loan account with SBI 🙂 unlike us 🙁

Hi manish,

Not sure if I will get a reply as its been quite sometime that this threads last post was posted. I took a loan for 17.5Lakhs from LIC Housing Finance. We sold our family property and I got a share of 4Lakhs,which I want to put into the principal amount. 2 questions here:

1.LICHFL agent says i have to pay 2% penalty..Is it correct? I heard RBI has weaved these penalties.But LICHFL denies it.

2.Once i pay this 4l, the outstanding comes down to 13.5. So will the Tenure come down? Or they will decrease my EMI amount? I effectively want the first option.

Request your valuable inputs

Karthik

1. Yes .. the penality might be there .. didnt you check this while taking the loan that how much was the prepayment penality ? generally these penalities are only when you make a very big lumpsum payment . Most of the companies allow some prepayment per month (approx upto the EMI value) , so you can make the prepayment per month for some amount without penality .

2. Yes , Outstanding loan will come down and mostly your tenure will come down . EMI;’s are generally fixed and this is the best option

Manish

Thank you Manish. No I didnt check it while taking loan.perhaps i didnt had that thought that I will do some part payment in the interim..

Once again thank you 🙂

Hi,

My salary is 1.5 lakh/mo. I want to buy a plot.

Small One is 80Lakhs. Bigger one is 1.2 crore.

I have 30lakh in hand and also have a flat of 30lakh worth. I pay monthly rent of rs 40,000.

Shall I get loan and buy bigger plot or smaller. Please suggest.

I know my query is not related to your post but you opinion will be valuable. Please suggest

Hi Manish,

I am planning to buy a plot in undeveloped area which I want to

Make my residence. Plot cost is 80 lakh. I have 30 lakh in hand.

My salary is 1.5 lakh per month. Can I afford this plot.

Secondly, I am keen to buy bigger plot of 1.2 crore. I have another flat which I want to sell for 30L.

So, which plot should I buy?

Shall I sell the flat first and then go for bigger one? As I am not sure that plot will be available.

I know these questions are not related to your post but Your opinion will be valuable

I had availed Rs. 4,65,000 home loan from ICICI Bank in year 2005. Currently Rs.4,00,000 is my outstanding loan amount and interest rate will be 8.25% till Feb,2012. Since last few years RBI is changing Repo rate every month which is directly affecting home loan interest rate and tenures. I am planning to repay entire Home loan outstanding amount by borrowing Personal loan from some other bank. Personal loan interest is 16% for 60 months. Does it make sense to close home loan by taking Personal loan. Pl advise. Thanks

Jiten

Not at all .. why do you think that it makes sense to pay the home loan by personal loan ? Does it makes sense to pay 16% to pay something where you are paying 8-10% . I am interested to know why you thought like that ?

Manish

Dear

I have selected Loan Tenure 60 month, Yearly Interest Rate 10% and Total Amount of Loan Rs. 100,000.00 your EMI size Rs.2124.71 and last installment is showing Rs.2124.28 but actually it should be 2715.265

Appreciate your comments in my Email.

Thanks

Fuad

Faud

Which figures are you talking about ? I have not considered any processing fees or extra charges

Manish

Hi Manish,

I have takenup loan of 35,62,000(34,60,000 Loan + 1,02,000 Insurance) for 25 years form SBI @10.75. my EMI would be around 34270.

Initially i was planning to go for taking 35,00,000 Lakh for 20 years tenure but I was getting this amount only for 25 years due to lower takehome salary/month.

Now I got very good hike in my salary. could you please suggest me what should i do at this point of time when i can pay more then my current EMI.

1. should i pay more amount along with my emi

2. should i pay some lumpsump amout after each quarter

Please provide your expert opinion.

Thanks,

Deepak

Deepak

Better you pay some excess amount each month . that would make sure your loan closes in just 15-16 yrs

Manish

Thanks Manish for your prompt Reply.

Could you please help me , in which account i should put more money, should i put on SBI max gain Over draft account or SBI Suraksha Loan account,

I am bit confused 🙁

Thanks,

Deepak

Deepak

Not that way .. just do a simple prepayment which will reduce your principle amount

Manish

this prepayment should be made towards loan account or maxgain over draft account?

or what is the process to make pre-payment.

Thanks a lot.

Deepak

Deepak

Towards loan account and the process is to make extra payment for your home loan , check with your bank

Manish

Manish, very useful article.

One concern i have is related to Home loan where loan is on Flexi plan. Now the case is that person A has taken 30L loan from bank where home is under construction. Bank says to start EMI after 2 years and person A has taken 15 L amount as disbursement from bank and paying the interest as well

Once 2 years completes, what should be EMI in this case.. is it on the total loan amount 30L or disbursed amount 15L ?

Ansh

At any point of time, the interest is aloways dependent on the LOAN OUTSTANING .

Manish

Thanks Manish, but my concern here is that the case is where the person has taken only 15L as disbursed amount, in that what should be EMI.. is it the whole EMI based on 30L loan sanctioned or is it the EMI based on 15L amount disbursed from bank ?

Ansh

EMI would be only for the loan disbursed till date .. but this is the question you should ask the BANK directly

Manish

Hi Manish,

Sorry Manish , I didn’t understand the Breakup of EMI. How Principal Amount Calculated? Interest Part i got it and how principal amount calculating Manish.

lal chandra

Actually you know EMI number and Interest number for a particular month, just deduct Interest amount from EMI and that will be PRINCIPAL , you can do it for any month .

Manish

hi manish , lik ur post !

can u suggest me hw do i pay the prepayment of my home loan. i hv taken a home loan from HDFC on dec 2010, loan amount is Rs3500000 and the tenure is for 20yrs till nw i m paying EMI ie. Rs34477 . can u suggest me hw do i pay my prepayment amount for the coming yrs ?

Sumit

All i would say is try to prepay as much as possible when ever you get the opportunity

Manish

hey!..can you update your excell sheet by providing additional column for prepayment (variable) for each month.

And even variable ROI ,as ROI changes everytime RBI screws!

with these incorportions, your excel sheet will be best for planning loan payment.

Regards and Best Wishes,

Sujit

Sujit

Will do it some time when i get dedicated time for that . for now you can find out how to do that . its pretty easy actually

Manish

Hi Manish, excellent and enlightning discussion. Well I also hav a query, I have taken two home loans (13 lakhs for 20 yrs @ 10.25% starting Jun 2009 and 14 lakhs for 10 yrs @ 10.75% starting July 2011) for two properties, of which one is utilised by my wife (joint owner) for IT rebate and other one is utilised by me for the same reason. I now hav enough funds to repay both the loans, however, I am planning to go for third property (for which I’ll have to again take loan of about 50 lakhs). Please advice whether I should prepay the existing loans (with this option I will have to take even higher home loan for third property) or continue with the existing loan and take additional loan (50lakhs) for the third property because managing so many home loans (3) will be cumbersome as also without any IT benefit from the third loan planned.

Secondly, do you have any calculations to know what is the effective rate of interest on home loan after taking IT rebate into account ?

Rahul

If your cash flows are strong , and you can service the EMI’s even if your income drops a bit or EMI increase a bit, then its suggested to go for loan itself, but if you are into a tight position , then better prepay the loans and take a further loan for 50 lacs , you have to compare both the situations and do some numbers .. have you done anything from your side ?

Manish

Hi Manish, thnx for the prompt response, really grateful. Well, my present outgo in EMI for existing home loans is Rs 32000/- and I hav a stable income of Rs 1.8 Lakhs PM. I hav reworked on my third home loan requirement which is Rs 25 Lakhs (not 50 lakhs as mentioned earlier) and that too in 2013 since the third property I hav gone for is under construction, if I do not prepay my existing home loans. In case of a financially tight situation or increase in EMI, which can be a possibility with anyone, I have some investments to fall back to. With this as a backdrop, I need your advice to either go for prepayment of existing loans(s) or go for third home loan from Return on Investement perspective.

My Second query continues as earlier ie. do you have any calculations to know what is the effective rate of interest on home loan after taking IT rebate into account considering I am in 30% IT bracket ?

thnx n rgds, Rahul

Rahul

I am not sure what are your other cash flows , but with 1.8 lacs of inflows , 32k in EMI is smaller outgo compared to standard percentage .. I guess if your income is stable and also expected to RISE 🙂 , you can go for the third home loan too … and you should be getting the tax advantage also , why do you think you will not ?

As you have 2 yrs in hand , I am sure there will be more CASH coming in and that you can use to prepay partly your earliar loans .. If your cash flow is strong and networth is “respectable” , then just go ahead ..

But make sure you take responsibility of your decision and have a plan B clear in mind, not because you are fearing anything but just from planning point of view .. here i am trying to be little aggresive in my recommendation .. after all … without aggression , you wont go very far 🙂

Manish

Hi Manish, thnx once again for the response. Well my cash outflows other than EMI are 30000/-PM in SIP and 60000/-PM for household expenditure. On an optimistic note, I agree my income will be stable and even rise in future and I can go in for third loan comfortably. How do u say I can get tax benefit from third property coz I think one can avail tax benefit for one residential property only which me and wife are already claiming from existing two properties, pls throw some more light on this aspect.

Do u recommend partial prepayment of any existing home loan (i would like to mention here that LIC HFL has a unique recovery policy wherein they are recovering both principle and interest equally in EMI even though loan has commenced in July 2009). Thanx n rgds

Rahul

So total compulsory outgo is EMI + Household = 92 , lets say 1 lac , so you are left with 80k per month , you can stop SIP thing for now if you want to go for home loan . Is this 80k Enough for all the EMI’s you will be having other than your current EMI ? If yes , then you can go ahead with next loan . If think it was pretty simple to conclude , where exactly are you stuck and want the advice ?

Manish

Mis-leading article …Don’t prepay anything ..when you take loan of 20L for 20 years and at the end of it your property would be worth 1.20 crore easily. now assume, you got 5L in the first year that you want to prepay ..instead if you invest that 5L in some land or stock and it would be 50L after 20 years going by past returns from real estate industry.

Smith

Not sure if thats very convincing , Prepayment is not only done from returns point of view .. there are other reasons also like getting out of debt “feeling” .. decreasing the fear of “What If I loose the job and cant pay off the loan later” … also with prepayment , your EMI duration will go down or EMI might go down and hence you are left with more money … So kindly give a proper comparision of with prepayment and without prepayment

Manish

That’s something that i agree. Being indians the “feeling” of coming out is something important to us.

Hi Manish, My doubt is, when an amount is prepaid, the complete prepaid amount is deducted from principal amount only or from the total EMIs amount for the complete loan tenure..? Thank you !

Hi Shiva,

I can answer that as I am currently prepaying my home loan. The EMI consists of an interest component and principal component. At the beginning of this year my home loan outstanding was Rs 10 laks. My EMI had Rs 8500 as interest and Rs 1800 as principal – so overall it was Rs 10.3 k per month for 15 yrs. Over the last few months I have managed to prepay Rs 4 laks. The EMI remains same, but now interest component is down to Rs 6000 n principal is balance.

In other words, prepayment reduces the principal outstanding overall n the effect is the decrease in interest payments on your EMI.

Dear manu,

Thank you for response ! so it is wise to prepay whenever we get money by some source..ok. thanks again !

Thanks for your inputs Manish, but it still partially resolves my concern. I am planning to buy a property under “No EMI” scheme, where the builder proposes no EMI for 24 months and possession in 27 months. Buying any other property would mean that I have start paying pre-EMI from day 1, which would be tough along with paying my current rent, as most of the builders are showing that they have already built upto 2nd roof, hence even under CLP plan they would ask me to pay around 50-60% within around 45 days. Therefore I am kind of getting interested with no EMI scheme, but am trying to understand if there shall be any tricks with it.

Thanks for your responses.

Cheers,

V

Vibhor

There are some points here ..

1. Real estate sector is going through rough time and getting cusotmers is not as easy as it was earliar , so it can be a genuine measure from builder side to get a customer

2. Another point is that the no EMI might be priced already in the final price of the HOUSE , what if the actual cost was 30 lacs with EMI from day 1 and builder tells you no EMI for 2 yrs , with cost of 35 lacs .. then whats a big deal .. so its not a FREE lunch , it might be factored in the price itself .

What is it that you need to pay in the start to him ? the booking amount ? Who is the builder , It would be good to initiate a conversation on http://www.indianrealestateforum.com/ , I really recommend that and i am sure you will benefit from the community there !

Manish

Excellent article and awesome discussion! I am planning to go for a home loan and trying learn all these intricacies. 🙁

Manish, can you also please shed some light on the tricks behind the “No EMI” feature marteked by builders (in conjunction with banks) these days for buying a house? Are there some hidden factors that we should know?

Thanks in advance.

– Vibhor

Vibhor

Mostly they are gimmicks , if you do maths , ultimately its not in the favour of cusomter , you can read this related article : http://foundation.moneylife.in/article/unreal-schemes/12126.html

Manish

Hi Manish,

I have taken a loan of 20 lakhs and I am prepaying the loan and now the balance is only 10 lakhs. Can I ask the bank to adjust my EMI to the remaining tenure?

Jaya

Depends on the bank , you can ask them to readjust the EMI , but because you might have given the PDC (post dated cheques) , there might be reluctance

Manish

Hey Manish,

Just happened to read this nice article of yours..awesome.

Can you be kind enough to forward all your loan related blogs to my mail..

thanks.

DD Gururani

I emailed you .. also posting it here for your convinience

—

These are some of the articles you will lik on loan

https://www.jagoinvestor.com/2011/02/4-home-loan-facts.html

https://www.jagoinvestor.com/2011/04/loan-amortization-emi.html

https://www.jagoinvestor.com/2008/01/how-home-loan-emi-is-calculated.html

https://www.jagoinvestor.com/2011/07/cibil-report.html

see more article at : https://www.jagoinvestor.com/archives

Some threads from our forum

https://www.jagoinvestor.com/search_results?cx=001060672559526089735:ppjgaimqrxg&cof=FORID:9&ie=UTF-8&q=loanforum&sa=Search&siteurl=www.jagoinvestor.com/archives#762

Dear Manish.

I want to Know regarding mine Term Loan . I have taken a Term Loan of 16 Lacs From SBI for Three Years. Till Today mine Account come under NPA Accout. Outstanding Till Today Mine Standing is 12.20 LAcs They have given me a Notice to Regularise it or they Will Use Take over The mortage Property.. Now i can’t pay at this time…. i can pay it with 4 -5 months from now. How i can Get the time from bank for it…. One more this is that i will have 10 Lacs within these 4-5 months. so what should i do in this case. please tell me

Shwetansh

Your query is not clear to me ,the term plan covers you form death, how is it related to you not able to pay back the loan

Manish

HI Manish

I have a query regarding Principal and Interest component of EMI. I have taken a home loan of Rs.20 lakhs (Interest rate : 9.5%, Duration: 20 years). As per my calculations and the caclulator provided by you EMI should be Rs.18643 with interest component of Rs.15833 and principal component of Rs.2810 for the first EMI. Where as per the bank statement Rs.17,356 was deducted as interest and Rs.1,287 was deducted as principal component in EMI.

It would be great if you could shed some light on the same.

Thanks in advance.

Ritesh

Problem resolved after talks with the bank representative.

The home loan interest rate has been increased to 10.75% 🙁

Hi interesting reading.

my question is, isn’t there any RBI ceiling on the maximum percentage of the interest component which may be charged by a bank?

for instance if in the first five years of a 240 month loan of 27 lakh, if I am paying 3 lakhs per year, my repayment towards the principal component is only about 27,000, which I feel needs to be regulated. What do you think?

I took a loan for 44L @ 10.75% from Axis. I did a prepayment for 3L and they reduced the tenure from 240 to 228 months. is there a calculator available to confirm the reduction in tenure is correct or not?

thnx a lot manish…its an eyeopener for me..

Hi Manish,

Nice article it is…

I had this confusion from long as to pre-pay the home loan or not…I had taken a home loan of 18L couple of years back and now the outstanding loan amount is around 15.80L with interst rate of around 10%.

I wanted to pay off the loan as early as possible considering the loan as a liability. But my father insisted to continue with the EMI at least till 7 to 8 years. His point is that till 7 to 8 years, I will be paying most of the interest part and this will be useful for me for claiming the income tax.

Following is the current situation –

Currently EMI – Rs 18500.

Monthly tax – around Rs 10000.

Annual interest for the home loan – 1.44L

So I understand my father’s point that I am saving income tax on aound 1.44L annually and also getting some tax benefit on the principal part.

My question is, shall I plan to close my home loan after 7 to 8 years from now or shall I consider the option of pre-paying the loan in every quarter as suggested above?

Thanks and Regards,

Kedar

Hi Manish/Jago Investor readers,

Please help me on this,

I want to go for masters for which I wish to take education loan of around 8.90 lakhs.Post my bachelors uptil now I had been working courtesy which I have saved 1.60 Lakh.

All banks give 1% interest concession on full tenure of education loan, if interest is serviced during study period which actually is repayment holiday/moratorium period.

I am in doubt if I should use some part of my savings to get 1%interest concession by servicing interest during moratorium period and rest of savings to minimize loan amount or I should use all of savings amount to minimize the loan amount and pay the loan back with original interest rate. Which one is a better deal? Would be glad if you can share the calculations involved in arriving at your conclusion.

Thanks

JG Fan Lucky

Lucky

I would say that if you can arrange for the interest part during study , then better pay it month by month , because if you dont, then all the interest part will be accumulated and your final EMI will rise to a good extent , but if you are sure that your salary after studies would be good enough to afford a higher EMI , then I think you can use the existing 1.6 lacs to be with you and keep for some emergency .

Manish

wow…this was a revealing article! though i new the breakup before I didnt know that shorter terms can be more beneficial esp. for smaller loans! Thanks Manish!

Pavan

Yea .. its just maths , if you can do some analysis , you are good

Manish

Manish,

Rate Type is given as : Monthly Reducing and daily reducing .

Please explain, what is the difference between these two ?

Which one is better ?

Mothly reducing means that any amount which goes towards Principle gets reduced on monthly basis , and in daily reducing its on daily basis

Manish

Thanks Manish 🙂

Hi Manish, You explanation was so good.

I have a query

Will it benefit me , if i pay EMI 5000 and Part-payment as 5000 (hope this will reduce my principal) insted of paying EMI as 10,000 ?

I know EMI with 5000 will increace loan tensure. But i belive that Part-payment of 5000 will help me to close the loan earlier than paying EMI 10,000 (with short tensure).

Please do help me out

Hi Manish, You explanation was so good.

I have a query

Will it benefit me , if i pay EMI 5000 and Part-payment as 5000 (hope this will reduce my principal) insted of paying EMI as 10,000 ?

I know EMI with 5000 will increace loan tensure. But i belive that Part-payment of 5000 will help me to close the loan earlier than paying EMI 10,000 (with short tensure).

Please do help me out

Balamurgan

Nice thought , but there is a problem i see , for the loan amount, there is an EMI for a particular tenure , if you increase the tenure ,the EWI comes down , but the problem here is that the EMI can not keep coming down , at some point the EMI will reduce to the minimum level and not go down further , so see what is the minimum EMI which you need to pay for a reaslitic tenure ? come back with figures !

Manish

Thanks for you valuable response.

I had also checked the below link for calculating the same.

http://www.finaid.org/calculators/prepayment.phtml

Hi Manish,

Excellent Article. I have a question for you. I have a Loan of 14lakh for 12 years. an d my monthly EMI at 8% for first year is 15,284.00

And after 3 EMI’s my loan is still 13,84,000. So if I make a Part-PAyment of 1 lakh , will this hit a Principal OR goes to the Interest amount too.

Edit Reply

Ramnath

Prepay ment will hit only principal , not interest . So your outstanding loan will go down by 1 lac . Do it .

Manish

Hi Manish,

Thanks for your Reply. I have couple of questions for you.

1. The Pre-Payment of 1 lakh made will have a Pre-closure charge of 2% as i have NOT compeleted 3 years after Loan Opened.

2. Is it Good to make a RD of 2k each month and pay at one shot of 24k at the End of the Year

OR

Pay extra 2k towards the EMI?

Let me know which would be better?

Ramnath

Better pay 2k as principal only and take that 2% penalty , but that 2% is penalty on what?

Manish

Manish,

i have take a SBI Maxgain home loan in Dec 2010

And According to it the ROI is

1st year 8% Fixed ROI

2nd and 3rd year 9 % Fixed ROI

and 4th year onwards Floating ROI.

By any chance my loan ROI during the first 3 years can change?

If Yes , Then why it is called as Fixed Interest rates?

regards

Ramnath

Ramnath

“Fixed interst rates” means “Fixed for X years” where X can be 3 or 5 yrs, after that again its fixed but based on current rates . So its not exactly “fixed for life”

Manish

In a way, both go down. When you pre-pay, your principal goes down. Consequently, the time required to pay goes down, and with that, the overall interest paid reduces.

Yea .. But the only gray point here is that the potential time for claiming tax deductions are getting smaller

Manish

Wonderful Manish,

I am actually thniking of repaying my loan amount completely which is around 60,000 (remaining for one year) but after calculating i feel putting that money into a Mutual Fund wold get me more money than i actually save on the interest as i am only paying larger chunks of principle amount.

Guide me if i am wrong.

Sunil

If its just one more year , then whats the point of pre-payment, anyways all the money you pay would mostly go in principal , so better pay per month only. also there would be pre-payment penalty if you pre-pay . So just pay the EMI for one more year

Manish

Hi Manish,

Nice article,

Would like to add this,

Why banks loan agent try to push you EMI payment on 10th of each month and not end of Month.

Reason they give is: “Sir if any month you get your salary late and not able to pay EMI you have 10 days to manage.”

Real reason , They want to earn extra interest of 10 days for full tenure of 20 years.

Thank you,

–Vivek

Vivek

Nice point 🙂

Manish

Hello Manish

I have a home loan of 15 lakh with a fixed emi of 12781/- till march 2012. Loan started in feb 2010. From April 2012 my intrest rate will rise for sure.

Should I make pre-payment now or do s0 in March 2012, so that I have the tax benefit on the full interest payment of this year and reduce the increased emi burden for coming years.

Lucky

Its not a one time decision like this, how long is your loan for ? If its a small tenure , then its a different thing , but if its 15-20 yrs loan , then majority of your loan goes in interest and you might want to lower it by pre-paying sooner .

Manish

Hi Manish,

Nice article, as always.

I was wondering about following possibility. I am sure you are aware of SBI max gain and similar product from HDFC where bank offers loan from 25L+ with current account like feature. You can reduce your loan amount by adding funds to a/c and on daily reducing your interest is calculated for month.

I have opted for such option, i have 30L loan EMI is around 34K for 15Y, i keep on adding additional funds to this account and thus my interest component decreases and i can take out additional funds when i need it.

I still have to pay EMI of 34K every month but i can take it back next day.

Why this option shouldn’t save lot of money during high interest period or is there i am missing altogether!

Thanks,

Vijay

Vijay

SBI max gain looks good to me as a design , all it says is put your addtional money in SBI max gain account and you get principal reduced as well as you also have the liquidity . Better you read this excellent discussion here : http://www.indianrealestateforum.com/pune/t-sbi-maxgain-advantage-10995.html

Manish

Very well written article followed up with very useful informative discussions.

Regarding part payment calculations, Is there some tool to determine the impact of part payment.

Manish, Pls share if it’s avaiable.

Nitin

Periodic Part Payments will make sure that a person reduces his interest part significantly soon and reduce the tenure . What tool you want ? You can edit the excel sheet given by me

Manish

Hi NitinJ,

the impact of part payment can be readily seen if u log on to http://www.bankbazaar.com, the Loan EMI calculator has a function of adding part prepayments and seeing the subsequent impact on the total interest payment.

dr kishan

Thanks. It helped to calculate exact figures.

Below is another good tool to calculate the impact of pre payment.

http://www.finaid.org/calculators/prepayment.phtml

Nitin

Thanks for the link

Hi Manish,

The article has given detailed insight on EMI. Thanks a lot.

I have taken loan of 12L for 20 yrs. from the syndicate bank under a scheme where the interest would be as follows:

first 3 years: 8.25%

next 2 years: 8.75% & after that some 2% lesser than the PLR.

Now, i just want to know how can i calculate the exact interest amount i will be paying and would it be benefitial if i prepay the loan for every year by some chunk as the interest rate is less.

Thanks,

Narendra

You interest rates are low (especially in the first 5 yrs) and hence you should enjoy that . However from long term perspective still you will be paying significant part in interest

Hi, I downloaded file from “Download Excel version of Loan amortization calculator (created by me)” link and it acutally download a WinZip file and that contains number of xml files than .xls file. Is there some other way to go about it? Rajeev

Rajeev

Not sure why ? It links to https://www.jagoinvestor.com/wp-content/uploads/files/img/files/loan-amortization-excel-sheet.xlsx . Download it

Rajeev – Are you using 7zip or something ? I suggest you to open excel application and then open the file. It should open.

I think its because of one of those new formats that Microsoft introduced for Office 2007 / 2010.

Hi Ajay, different version of MS office may be the reason. I am using MS Office 2003 and just now getting upgraded to 2007.

Manish

Nice article indeed. this is really an eye opener for many. in this connection i would like to share some by principle while i take a loan.

our family has till now taken about 5- 6 loans inthe form of car or home loans. some have been fore closed also. at the present too i am running a home loan and car loan from sbi.

while doing the research i found out that some times there is a probability of bargaining on the rate of interest especially the private banks. we should not think that the available information is the final ROI. the banks have the facility of reducing the ROI making use some special powers given to the senior officials. when i approached ICICI for car loan i was first told that the ROI is 10.5% but during the negotiation they came down to 9.5% and probably would have gone further down i had persuaded more. secondly they are ready to give discounts on processing charges or may even waive them completely in some cases as offered to me. i didnot try this with SBI but i think that SBI wouldn’t have reduced the loan ROI. so i would suggest to negotiate hard while taking a loan espl. pvt banks.

secondly now a days teaser loans are being offered making the picture rosy for the initial period. but ROI increases after some period and then the picture is clear. what i have done is i calculate emi on the basis of max ROI which has been in the past that is around 14% (and not 8% which is initail offer ROI) and see whether this emi is payable by me or not and then calculate my LOAN amount so that even if the ROI increases in the future i am ready for it.

thirdly there is a very nice EMI calculator at http://www.bankbazaar.com and even the loan transfer claculator. these have been of great help to in the past. they give many info like annual interest pay out. we can add probable pre-payments and also see how it affects or interest and loan tenure.

thanks

dr kishan

Dr Kishan

Wow .. you have calculated the EMI on highest possible interest, thats something very smart and one has to do it that way only . Thanks for sharing your experience .

Manish

Excel has the PMT, IPMT, PPMT functions that can be used to compute the EMI, interest, and principal respectively.

I have heard about PMT , what is IPMT and PPMT ?

Manish

Manish – Interest and Principal Payment 🙂

In fact they are easy methods for getting the loan EMI, interest and principal details, nevertheless the spreadsheet that you have created foes to the basis of those formula.

As usual an impressive article. However I felt that this article could have focussed on impact of rise in interest rate on EMI rather than simply describing what constitutes EMI.

Let me explain my experience of home loan EMI. I was able to hit two cycles on my home loan i.e. securing the loan when the interest was at its bottom i.e. 7.25% and went to the peak of 14%. This is to say, keeping same EMI, the tenure is almost doubled. Some banks chose to increase the tenure as long as 45 years. Others had kept a ceiling of 30 years and effected part EMI rise on their own.

I got a funny discussion with a private bank when my under 10L loan interest was spiked without a reason. The officer said that I should not bother about hike because the interest portion is still under the tax limit of 1.5 lacs. Most of the private banks have misused home loan tax advantage extended by GOI to levy higher charges causing loss to the exchequer.

The banks with sheer institution size are able to guage the interest cycle much better than the retail loan customer. No wonder when the interest cycle goes downword, they are extracting charges in the name of reducing the rate. I believe the customer get benefit only when the extended lower rate is sustained beyond 2 years. Else it is same story for the customer. The private banks knew the game and they continue to ensure 11+% rate of return on home loans.

Krish

Yes , this is one common problem where if a person takes loan on floating rate basis , his EMI’s or tenure gets balloned later with interest rates hike and at the same time banking are not ready to lower it suddenly when the reverse happens

Manish

How can I get a Future Payment Schedule for a flexi-interest rate loan. For e.g. I have taken a loan of Rs. 10 lakhs for 15 years with 8% interest for 2 years & then 8.5% interest for next years & then prevailing float interest for next 11% years.

I am planning to pay-up the loan in the fours years.

Can I have calculator for this thing, as I feel this is an ongoing interest rate scenario for all the home owners?

Rohit

I have given the excel sheet for down load at the end , you can see it at the end , the one created by me , in that sheet you see the interest for each month , change the interst as per the condition and you well get the appropriate answer

Manish

Hi Manish,

Very good Article.. I work in a Banking product company and in the Loan Module and we know how the banks all over the world wants us to calculate the components of a Loan Product.

As you said, out of Rs.28,950, only 3,950 goes to Principal which makes the outstanding principal decrease to a peanut size…

I prefer, instead of having a fixed tenure like 5/10/15/20 yrs, we should buy the loan based on our capability to spend per month on an EMI.

As the initial years has a big chunk of interest component, the first EMI should be in a ratio of atleast 60:40 for Interest:Principal. Based on this, we should calculate the tenor. The Banks deliberately makes the tenor as fixed one and calculate the EMI which makes the interest component in EMI as higher.

The best options are

1. Increase the EMI whenever you can pay more money. This will reduce your tenor and subsequent interest payments.

2. PrePay a huge chunk if you have a lot of money irrespective of the Prepayment Charge.

Increasing EMI by 5000 will save you a lot more than if you save that 5000 for one year and prepay it. Because the recalculation happens only from the day you prepay. But if you increase EMI, your recalculation happens right away which reduces the total interest payable.

Also, Variable Interest rate, one should keep an eye on the outstanding principal always.

Regards

Karthik

Karthik

Thanks for the comment , I agree with both of your points . I liked your point of increasing the EMI , instead of prepaying the loan . This is some good advice to be used for one of the next articles

Manish

Hi Manish,

On the two points i mentioned, it depends on the financial situation of an individual.

When a guy receives raise in his monthly salary he could raise his EMI.

When a guy receives a huge bonus, he could do a principal prepayment.

Both the options will help. Out of the both, raising the EMI option will help more and the decision should be based on the situation.

In some banks around the world, there are options to do a prepayment along with the installments. For eg.. Consider an EMI as USD 560. If the Customer has USD 600, then the system allocated the USD 560 to his current installment and prepay the excess USD 40 as a prepayment. This is more in case of microcredits. In this case, the customer has the leverage that, the whole $40 will be allocated to Principal which will further reduce the Oustanding Principal. Some banks have minimum prepayment threshold. Also some banks allows prepayment for any value and without any charge.

Another point I disagree generally is… The loan vendors say that they can use 1.50 Lakhs exemption limit. This is an exemption which should be used for the advantage of the individual and not the Bank. Bank generally increase the tenor which will increase the Interest part and so they sell the loans by telling.

1. The EMI is less..

2. The Interest will save tax..

If the Banks increases the EMI instead of tenor.. this will reduce the tenor and overall interest payable and you could still achieve the 1.5 Lakhs limit. In general loans is a liability and 1.5 Lakhs is an expense for the Customer anyways and it should dealt carefully.

Regards,

Karthik

Karthik

Even in India i suppose one can pre-pay the loan upto the EMI money each month ? No ?

Manish

Manish,

I don’t think banks in India offer this facility to make prepayment along with every installment. I had heard some banks has a limit like 2 per annum. It depends on the Bank’s policies.. Generally, they have a minimum threshold.

Karthik

SBI has this and it doesn’t have any cap on number of transactions

I have a home Loan with Axis Bank.

They have a clause that Prepayment amount has to be higher than 3 months EMI, but I can Pre Pay once every Quater..

What will be the effect of DTC when it comes into picture?

Effect of what ?

No changes due to Direct Tax Code.

Hi Manu and Nicket,

In the Direct Tax code which will come into effect from 2012 principal paid on home loan will not be considered for income tax exemption as is the case for the current year.

Principal : Exwmption upto 1,00,000/- under section 80 C— Not applicable under Direct Tax Code 2012

Manish,

I have a Home loan with HDFC for 17.5L which has EMI started from this april.

I am thinking in below lines about the prepayment based on tax exemption.

I believe Home Loan at 9.25 is cheap at current stage.So i will keep paying my EMI and save some amount in a liquid scheme until march 2012.At the time i will calculate the left out amount of 80C after calculating my EPF,TermInsurance,Medical insurance etc. And i will pay this amount as pre payment.

While doing this i will also make sure i constantly do my investing in SIP,which i believe to give 10-12% returns on a long term.By this i will be having good savings and balance pre payment of loan.

Is there a flaw in this method that you see?

Prabeesh

Why are you not prepay the loan each month with that amount which you are thinking of investing in liquid fund ?

Manish

that seems to be a cumbersome activity as i need to make DD for that amount..Will that work better on quarterly instead of yearly?

Also one more question?

How do i calculate incase of EMI started before the complete disbursal of the loan amount. Like in my Case i have applied for 17.5L so far only 10L is disbursed but i started the EMI now itself?

Prabeesh

quarterly thing looks better if it demands DD each time, dont your bank have it online ?

Also check if your bank is charging only interest part before the full disbursal . Is your loan a pre-EMI loan ?

Manish

Hi Manish,

Great article!

One should also look at home loan interest from Taxable perspective. Not sure how long the limit of 1.5L will remain, but one can always repay the loan once Interest component falls below the 1.5L limit. Definitely by that time one has paid more principal and less interest but thats how the EMI funda works.

Loan amortization is great tool, thanks for sharing. Helps in seeing which loan is eating more into your expenses

Cheers

Atul

Atul

Yea . once has to consider the interest component tax benefits also while looking at his calculations .

Hi, very interesting conversation. Manish, could u pls help in calculating net interest rate on Loan (20 Lacs, 9.90% fixed for 5 years, 20 years tenure) for first 5 years by considering tax exemption on Interest part (1,50,000/-)? I don’t what interest rate may be 6th year onward for next 15 years:(.

I am keen to compare above option vs interest earned on FD at 9.50% (non-taxable due to slab thing):).

Rajeev

It depends on the market conditions what will be interst after 5 yrs , I am not clear on what comparision you are looking at ? Give more inputs on that

Manish

Hello Mr. Manish,

Its too good article, very informative.

Well for the person like me who has lack of info about loan and its replayment structure.

Actually im seeking your input on our transaction.. we have taken a home loan from idbi, the loan amout is 30L for 20yrs tenure @11% rate of interest. Its almost a year past we are paying EMI, now we came to as per bank statement out of our EMI only 30000 is been adjusted against our principle amount and rest was the interest as on.. as we had no idea about this calculation of EMI adjustment.. after going thru this block somehow my doubts are cleared. But not completely. Well can you please explain at what proportionat this adjustment bank do approx. calculation. As we both are earning, EMI has been deducting from my husband’s account. We are trying our best to reduce the burdan by making prepayment in early loan period e.g. in 1st 5 years. Pls advise at what structure we should go for prepayment.. please give some examples that way we can work on our transaction if that would be possible for us. Also advise is it feasible if we request bank to shorten the loan tennure at the time of making prepayment. Pls advise.

Priyanka

Priyanka

Note that you have a Constant EMI every month which is calculated in the statt only at the time of taking the loan , now the interest part would depend on the loan outstanding , as your loan is for 20 yrs , in the starting years the INTEREST part wouldbe very high and principal part is very low , so even if you pay 30k X 12 = 3.6 lacs in first year .. most of it was INTEREST . so now what you should do is , if possible better PREPAY the loan every month with a certain amount .

Every month put 10k or 20k extra as PRE PAYMENT and this should make sure that you complete your loan in less than 10 yrs

Manish

Thanks Manish!

hi Manish, Nice article!

One takes a loan of 60L for an under construction property. The disbursement is say, 20L in first year, 20L in second and 20L in the third year. Each year its done twice, means 10L every six months. The borrower opts to start his EMI immediately after the first disbursement. What will be the effect on the component of interest and pricipal in this case?

That one may be me. I dont yet know which lenders give this option to start EMI early.

Nicket

What you are talking about is very much like Per-EMI option . Its not exactly pre-EMI , but very much like it . If all the conditions are same ,you should opt for paying it late . From your side keep the EMI in an RD , and delay the payment if you can (assuming there is no penality of extra cost)

Manish

Thanks for the reply Manish,

What’s the advantage of RD? The interest rate on Deposits is lower than the housing loan in general. The one advantage is, you have an option of using that Fund elsewhere, if needed. That too is dangerous!

To me the psychological burden of debt is more difficult. As I have life, till now, free of debt and credit cards.

Nicket

I am assuming that you have an option of making a late payment, so if you can delay it by all means, but from your side , keep the EMI’s in some investments which is liquid

Manish

Thanks Manish, Again there are pre payment charges.

Well, Finally, I have developed something with the help of RBI! So if you opt for starting the full EMI from the very next month of the first disbursement by the lender, then your EMI is Rs 56753 and if you assume that you take full loan (ready property) disbursement then the EMI will be Rs 64477.

Now understand that, in the pre-EMI option, for the first 3 years one is paying only interest, the principal remains same. So your total out go is pre-EMI for 3 years plus EMI of Rs 64477 for the next 15 years.

This is for 60L loan for 15 years at 10% fixed monthly reducing balance.

Hi Manish,

Thanks for useful article. I have taken home loan of 25L from SBI. My current EMI is 25,000 approx. My question is: If I change EMI to 27,000 – will it be usefule or should I save 2000 each month and should do prepayment ?

Your reply will be help ful.

Bhargav

You should be doing prepayment ,remeber than if you make it part of EMI , the major part of that 2k will also go towards interst and not principal , but prepaying , all of it will go to principal . But if you make EMI as 27000 , there will be some reduction in your tenure , but overall , you should pre-pay

Hi guys,

Just wanted to share my experience here.

I have a loan of about 14 Lakhs which i borrowed from ICICI bank in year 2006. Initially my EMI was around Rs.12500. After the increase in the interests rates they increased my emi to Rs.14200 and my tunure close to 30 years (interest rate @ 13%. initial tenure was 20 years @ 9.25%). I also had a car loan for which the emi was around Rs.7000. This car loan was over in the year 2009. I contacted ICICI customer support the immediate next month after my car loan got over and asked them to increase my emi to Rs.20000 (i was already habituated to pay Rs.21000 as EMIs by then). Fortunately without much trouble they increased my EMI amount to Rs.20000 per month and the tenure came down to around 10 years 😉 . Now, during last year June, I got an email from ICICI about this scheme to reduce the home loan interest rate to 8.5% fixed upto Mar 2011 after which it would become 9.25% fixed until Mar 2012 and would be FRR-2% from Apr 2013. I immediately approached the bank and learned that I had to pay around Rs.7500 to avail this offer which I did. Now my tenure came down to 6.5 years. I still am paying Rs.20000 as EMI so that my loan principal comes down drastically before Apr 2013 so that my tenure does not increase astronomically when the interest rate becomes FRR-2% in Apr 2013. I am planning to close my home loan in the next 5 years by making some partial payments in between.

Regards,

Arudra.

This one was good. You are the first customer of ICICI who din have any complain about them. Good to learn, for a change.

Nicket,

Not really. Even I am a victim of ICICI Bank. Fortunately not with Home loan but with my ICICI credit card. 🙁

Regards,

Arudra.

Arudra

Thats good experience , it shows how prepayment can help in reducing the burden .

Manish

One more thing that this post made me note is about the break up in the Home Loan. We do take tax debates for different part of the loan i.e.:

Interest : Upto 1,50,000/-

Principal : Upto 1,00,000/- under section 80 C

For ex. a 20 Lac Loan, in the initial years 5-6 years, interest component is high, so total 1,50,000/- rebate can be taken but in the later the interest component will fall and thus the interest rebate amount will also fall below 1,50,000.

Similarly, for 80C deduction, the amount will increase in the later years and possible, only home loan principal repayment and PF will take care of 80C 1 lac investments.

Beacause of these factors, some of us may need to relook at the tax saving investments under 80C like ELSS investments ( which may no longer be required ) and overall tax liability ( which may increase in later years ).

Also, this will be different for each loan depending on the amount and no. of years, thus, each one will need to individually calculate. Hope this helps, correct me if am wrong

Sumit

You raised a good point . You are correct . In the initial years the interest component will cross 1.5 lacs , but not principal part . Also one thing one should keep in mind is that tax rules might get change after 5-10 yrs, so we can think about it today

Manish

Sumit

You raised a good point . You are correct . In the initial years the interest component will cross 1.5 lacs , but not principal part . Also one thing one should keep in mind is that tax rules might get change after 5-10 yrs, so we can think about it today

Manish

I am confused while reading your prepayment example. You say if I prepay my loan in the 5th year i have to pay the bank the enitre loan outstanding of 2,694,072. The is the amount outstanding which includes some portion of principal and interest calculated for the next 15 year period. So If I prepay my loan at year 5, shouldn’t the prepayment amount be less than 2.7 million because the tenure of my loan is effectively 5 years instead of 15 years. Shouldn’t the bank look at the principal outstanding at the 5th year and recalculate the interest component taking into account that my loan was for 5 years only and not 20 years that i had initially signed for?

Why should I be paying 2.7 million which contains interest for next 15 years, when i am closing my account in 5 years. I should be charges for 5 year interest only.

Santosh

No , It does not work that way .

When you initially take a loan for 20 yrs, it out means you are saying that you will for 20 yrs and not 5 yrs . Later if you pre pay the loan , it was your decision later , bank has nothing to do with that . Remember that at any point of time you have to pay “Loan Outstanding” . Loan outstanding means “the loan which you to pay right now” . So when you want to prepay the loan , you pre-pay the loan , it will be even more than outstanding loan , becasu there will be penalty for prepay also “_

Manish

Yes, Lakshman, it was an ICICI Bank Home Loan. I tried to explain to the Customer Care about how ridiculous can it be that the bank expects someone to pay a 45 yr loan (it was a 25 yr loan) but they had no answer to that.

From what I have seen, only public sector banks seem to be giving an online option to do part payment of principal..You can see the o/s at any point of time in ICICI but principal part payment is not allowed..HDFC Ltd allows you to pay online but only of the EMI and not of the principal alone and even here, they charge Rs 100 per payment..

Hi,

If your loan in ICICI bank, keep visiting (when you have a time) Branch and ask any offer they have currently.

In my case, last year my int rate was 13.75% and my loan balance was 3Laks, when i went to pay my part-payment I asked the person if they have any special scheme.

They told me if you pay 0.5% of your outstanding, your int will be reduced to 8.75% (surprise)

So I paid 1500 only (which is 0.5% of my outstanding) and reduce my int rate to 8.75%.

Regards

Nagarajan

Pradeep

See my reply to Laksmanan above, that will explain why the tenure went up to 45 yrs .

Manish

I am a banker myself, so I don’t deny the mathematics that will lead to a loan going upto 45 years in case of a rate increase but no credit evaluation team will ever give a loan for 45 years. When a loan appraisal is done, the age of the borrower is taken into account, so a 45 yr loan is totally meaningless. Normally, there is a max. tenure that is set for any loan and in case the max. tenure is reached, the EMI is increased by the bank itself.

Pradeep

thats good actually .. thats what should not happen and ideally bank should raise EMI , but here we have taken a case where it went to 45 s yrs, but what about some one who has taken a loan for 5 yr and it goes up to 12 lacs ?

Manish

E. Pradeep

I am surprised your EMI tenure got increased to 45 years!! Which bank is it? ICICI? I am surprised that its not easy to part-pay…

I have a Home loan from state bank of travancore. I have online access to the loan account and part-paying is simply initiating a neft transfer from any of my saving accounts to this loan account. It has been very convenient so far.. Since its online, i can see the outstanding principal amount i have on any given day.

Laksman

Loan tenure extending till 45 yrs is not a function of which bank is it ! . It will be done by any bank, its mainly dependent on interst rate movement .

for instance , if one has a loan of 40 lacs at 10% for 20 yrs tenure , the EMI comes to 19300 . Now if interest rates move up and increase upto 11.5% , then inorder to keep teh Same EMI , the tenure has to go up to 45 yrs , check it at https://www.jagoinvestor.com/calculators/html/EMI-Calculator.html

So the best thing would be to increase the EMI would not be that substantial

Manish

I want to share similar case with our home loan in ICICI. We did not check the interest rate for more than 6 months. The EMI was being deducted regualarly. There was no communication (email/phone/letter) about the hike in interest rate change. Suddenly, when we see the schedule, the tenure was increased by more than 5 years because of hike.

And, when there is any scheme ongoing (like pay 0.5% or 5,000 and and get the interest rate reduced by 2%), there will not be any communication in any medium not even their site. At least, I have not seen any time. Only when you call them by yourself and ask them now and then, they will inform you about such schemes.

Once you pay some amount (e.g. 0.5%) and get the interest rate reduced, there is no gaurantee till what time it will be intact. Any time when the home loan rates are increased, the interest rate will be increased as per the new rates. Again, they will bring new scheme. (This time, we have been asked to pay 6,000 to get 0.5% reduction)

Vishnu

Even Nagarajan shared same kind of thing .

Manish

Good article, man! Very enlightening! However, a teeny-tiny correction… when we refer to the amount on which interest is calculated, the spelling is

‘principal’and not ‘principle’ (as can be verified here.R

thanks for pointing that out . I made the changes

Manish

Two ways of faster repayment are making part payments and increasing your EMI. No bank allows you to an online part-payment and you have to visit their Home Loan servicing branch only; an attempt probably to dissuade customers from making part payments frequently. Thankfully, part payments do not have a penalty in most banks.

Normally, banks increase your EMI when the rate increases and decrease the tenure when it falls. Due to falling interest rates, my EMI had fallen initially but later on, the tenure kept on increasing till it ballooned to 45 years (Have no idea how the bank expects customers to pay off loans with such high tenures). If you go to a bank and ask for an EMI increase, it happens immediately but now ICICI Bank asks for a credit evaluation and so you have to submit salary slips and bank statements and even then, this took me 3 months after 8 phone calls, 6-7 mails and close to 3 levels of escalations. How come they can reduce the EMI without my consent but to increase it, I need to prove my credit worthiness? Now, I plan to transfer this home loan; wonder how tedious this would be looking at the way they have handled my EMI increase request.

State Bank allows you to xfer funds from savings to loan like a normal account xfer. Makes life easy 🙂

Ajay

Thanks for that Info

I agree with Ajay. I recently transferred a small amount online and had no problem. I was told by the branch manager, that as long as these funds from my own account as a result of my own savings, then I don’t get hit with penalty.

Pradeep

What bank does is in thier interest . If they increase your EMI , it would would benefit you and not them , So they incrrease the tenure . Its not right i agree .. the bank has to be flxible in both direction .

Thanks for sharing your story

Great article. It would be nice if the calculator table gives the total amount interest paid after the loan tenure.

Praveen

Praveen .. Hmm.. you can get that for now at https://www.jagoinvestor.com/calculators/html/EMI-Calculator.html

Hi Manish,

I am also addicted to your blogs..Made a habit to read your blogs during lunch time ..quit rediff and other timepass websites 😉 .. Here i go ..

I took 10Lkahs loan last year July with 9.25 % intrest rate ,for 15years.Fortunately after few months i got a chance to go overseas and now i am in a good situation to repay atleast 3-4 Lakhs .

Just need you suggestion how to go about it. Sooner the better isn’t it ?

Could you please tell me what will be the outstanding amount if i pay 4lakhs (prepayement) by this year end and also let me know the the EMI amount after the prepayment.

Hats off to you boss.

Joel.

Joel

As per your info , your current EMI should be around Rs 10,300 (Not included things like processing and other charges , take it as approx) ,.

Now if you repay around 4 lacs, your outstanding loan would be around only 6 lacs (assuming everything else is same) . So , your new EMI would be around 6,200 .

Coming back to the point of wheather its good to pre pay the loan always , its not TRUE .

Your interest is only 9.25% , which is a cheap one . If following 2 things are true , then it does not make much sense to close the loan .

1. You claim tax benefits on house loan

2. You are doing your investments wisely and earning better than 10% in long run , which you can get in long run in equity .

Manish

Hi Manish ,

Thanks for the quick answer .I did a rough calculation.

Let me assume , i am going to prepay 4Lakhs at the end of Dec 2011.

Till this date i have already paid the bank 18 EMI’s @10300 rs =>Jul 2010 to Dec 2011 => approx 1.85 lakhs .And the outstading amount @ dec2011 is 9.5 lakhs.

Now i paid 4 lakhs as prepayment. Hence my outstanding loan amount will be reduced to 5.5 Lakhs. My new EMI will be Rs 5900 (i calculated this based on 162 months=>180-18 ,intrest rate 9.25 % and loan amount 5.5lakhs).

Let me assume ,i do not prepay the loan here after . Thus i end up paying 9.55Lakhs after 162 months (162 * 5900 rs) .

Hence the total amount that i paid to the bank after 180 months is

1.85 lakhs + 4 lakhs +9.55Lakhs = 15.4 lakhs.

I had not done that single prepayment ,then i would have paid a total of 18.5 Lakhs (10300 *180) . So there is a gain 🙂 Isn’t it ?

So in my case it would make sense to prepay the loan since,

1) I am not going to sell me home (want to live permanently there).

2) Tax benifits => i can not claim atleast for 5 years as a feel that i will be based overseas for the next 5 years.

Please shed some light .

Thank you.

Joel

You are missing an important point here . You are not considering present value of money .

In you case you are assuming that paying 15.4 lacs in case of prepayment is “gain” rather than paying 18.5 lacs without pre-payment . But in case of pre-payment remember that you paying 4 lacs in one go NOW , thats a big thing , in case of paying EMI for all 10 yrs , you are spreading the payments to a bigger duration so the EMI’s paid at some later years will be cheaper for you .

You need to incorporate this into you analysis too .

Manish

thanks for all your information. i got stuck with a problem and that is — for a loan amount of 27L with rate of interest 10% for 240 months if emi is 26056 then how we can find the share between interest and principal.

Ravi

You can find it using this : https://www.jagoinvestor.com/calculators/html/loan-amortization.html

Manish

Manish,

You explained it wonderfully with a great example. I have just one doubt. As in your example someone prepays the loan after 5 years from first disbursement and has already paid 17 lacs in EMI. In this case the interest paid so far was a part of total interest calculated for the period of 30 years. Does the bank recalculate the total interest at the time of settlement for the new applicable period (5 years in this case) and comes up with the amount to be payed by the borrower? I hope an clear in my problem statement. If not, do let me know.

Nitin

Actually you are not clear to me , But let me try to answer still .

At any point in time , you have some outstanding loan , which is your total liability . With each EMI , you reduce the principle part from that EMI , and you have a new outstanding loan .

So in my case , after 5 yrs, you have outstanding loan of some Rs X , and from this point, what happened in past have no relation with what happens later .

Manish

Nitin,

At any point of time, if u want to prepay the loan, u have to pay the outstanding loan amount(value of last column) only. which in ur example would be 27 L.

if u think that in 5 years, interest got paid for 20 years calculation, it is not correct.

I think for each emi, interest is calculated based on outstanding amount only, and so interest does not depend on tenure of the loan. so when u prepay, (in other words change the tenure of the loan), no need to recalculate the interest.

Nitin

I get what you want to say , Interest does not change for a particular year becuase of tenure change ,but its indirectly related to tenure . Tenure decides how much is the interest part of your overall payment .

Like if your tenure is 20 yrs then your interest payment might be Rs X , but it can be 85% if your EMI ,. but in other case if tenure is 10 yrs , even though in this case interest is again same at Rs X , it might be 50% of your EMI , so from customer point you have to look at that part . I hope thats clear to you

I am still not clear on the conclusion . Are we discussing what you actually wanted ?

Manish

nice article!

Can we bargain with the bank to change the principal and interest portion of the EMI?

What do you mean by bargain here ? You can decrease the interest part, but then your tenure will increase !

Nice Article Manish! I’m getting addicted to your posts!

Sunnydoc…

Sunny

great to hear that 🙂

Informative reminder.

I took a loan fron ING Vysya @10.5% in 2008. Condition is that i cannot prepay more than 25% of the outstanding in any year. I missed it in teh first year and for the past 3 years i am religiously paying this 25%. I feel i will be able to come out in a couple of years. That is one reason why even though they raised the interest rate to 12.75%, i didnot feel the pinch.

If one plan and goes for prepayment, it is using the bank’s money for our use. If one pays for the full tenure, it is the bank which benifits and not us.

Thanks for the nice post, Manish

Srinivas

Well.. I agree with you largely , but one the other hand I would ike to say that for many keep paying home loan EMI for long term may make sense , provided they earn better returns on their investmetns and utilize the tax benefits also .

Manish

Manish,

Excellent article. I think it is better to make part payments every year, I did the same for my home loan. Instead of keep the money is savings account its better to reduce your loan burden.

Rakesh

Rakesh

Thats what i also advocate ,but tax deductions is one thing we have to look at and consider it in overall planning

Hi manish,

I would like to understand that what happens in case of Prepayment of entire loan amount buy using another loan.

using same numbers, 30L, 240 months, 10% interests, i see the emi is 28950. after 10 years, balance due is 2958978. Now if want to make a prepayment of this loan by using another new loan for rest 10 years. i take a loan of balance amount i.e. 2958978 for rest 10 years as 10% rate, i see emi comes 39103.

Ideally the emi should not change much. I am surprised that what factor i am missing here.

If it was the right calculations, then how come people change banks for less interest rates.

All,

ignore this one, i kno what was incorrect in my calculations 🙂

Nitin

Please let me know what was the mistake you did ? mistakes are the best way to learn

Good one Manish. One strategy that I have been using is quarterly part prepayment of the loans, to keep my interest component low

AJ

I think its one of the best option , as its less of headache and serves the purpose . Paying each month would be a hassle

The most important aspect of knowing the break up of EMI is that Pricipal and Interest Repayments are deductible under different sections of the Income Tax Act and have different limits attached to them.

Unless and untill you dont know the break up of your EMI, you wont be able to claim benefits is these have to be disclosed in the Income Tax Return.

Karan

Yes .. Most of the people take the detials from the bank at the time of filing the returns .

Manish

Nice article manish ….

Nagarajan S

Nagarajan

Thanks , keep reading 🙂

Thanks Manish

I would like to share my experience with all.

I have housing loan with ICICI bank for 4L.

EMI start from Apr 2007 and it was upto 2030 (4731 is my initial EMI and 4k+ is interest and some hundreds only in principal amount)

Apr-2007 loan amount 410520 @ 11.25% interest

….

Dec-2008 loan amount 400116 @ 13.75% interest

See, I paid 20 months EMI (20 X 4731 = 94620) and my principal reduced only 10404. Beauty is here, my housing loan is 4 laks and 10520 is ICICI insurance for my home.

After paying 95000, i paid only my insurance amount and my loan is still pending.

I blindly paid my EMI without knowing Principal and Interest part.

Jan 2009 – Apr 2011 period i paid half of my loan (by part payments and increase EMI)

As of today my loan status: 190000 and loan will be closed on mid of 2013 🙂

But i have a plan to close my loan before 2012.

Thanks

Nagrajan S

Nagarajan

Exactly, what i said in the article . The same thing happened to you in real life . I think as it was a smaller loan , you should have taken a smaller tenure loan which would mean your EMI goes more on principle part and less on interest . But anyways , I think its better to close the loan faster .

thanks for sharing your case .

Manish

Thanks Manish …

Hi Manish,

Till now, I was always of the mind that the longer the tenure, the easier the payments and the simpler it gets to pre-pay the loan…

Great going… thanks 🙂

Regards

Kriti Parikh

Kriti

Yea ,, thats how most of the people think .

Dear Manish,

I was looking for a Home Loan Calculator which will also accomodiate Intrest changes during the entire loan period ( ie change of intrest rates during the actual tenure of the loan ), this will be very good tool to check the actual impact of intrest on a floating rate home loan.

Regards,

Arun

Will accomodate it soon …

Yes that indeed would be extremely useful