Home Loan

POSTED BY Farshid Bokdawalla ON December 18, 2012 6:04 pm COMMENTS (9)

Good day gentlemen

 

I am looking out for a home loan and as such have narrowed in on two players, viz. State Bank of India & HDFC. I have very little knowledge & experience in financial matters & this is my first major step in building up my assets. I have a small query which I wish to share here & am hoping to seek the advice & guidance of people on this forum.

I understand that every EMI has a principal component & an interest component. The interest component being higher at the start of the repayment period & the principal component being lower. Also, the EMI for a loan with a longer tenure would be smaller than for one with a shorter tenure, although the interest payable would be greater.

My question to you gentlemen, is it advisable to take a loan with a longer tenure to have smaller EMIs & use the amount saved in EMIs along with any surplus amounts to make prepayments toward the loan amount (principal) rather than pay high EMI & possibly not have enough funds toward prepayment or bringing the principal amount down? Is there some way of physically calculating this either manually or through an excel sheet.

Your guidance & replies toward the same would be highly appreciated.

Thanks & Best Regards

 

 

9 replies on this article “Home Loan”

  1. Farshid Bokdawalla says:

    Thank you Mr. Singh…Will apply to get a CIBIL score.

  2. Biswa Singh says:

    CIBIL is kind a must and you should do that. Almost all banks ask for it during home loan.The only charge rs 450/- i guess. Also you will come to know if there is any problem. You should get your CIBIL score once in every 2-3 years.

    One thing i can gaurantee is that people like Manish are much better than any one working in SBI in personal finance. I will go with Manish rather than believing any one from SBI as they are bank employee and not Personal Finance expert. I personally work in Financial domain and i have seen people are great at the domain knowledge like Interest Rate Swaps, Futures & Options, equities, etc. but hardly know what to do with their money and bad at personal finance. This is the only authentic platform where you are assured to get correct answers.

    Rule of thumb about EMI – Chose an EMI that you can pay comfortably without impacting your personal life. Any extra money you could save transfer it to your SBI max gain so that your interest component will reduce. Once you have enough money in your OD account to close your loan then close it.

    But its a completely wrong idea to pay less EMI if you can afford to pay more or increase the EMI tenure and by paying less EMI whne you genuinely dont require it.

  3. Farshid Bokdawalla says:

    Thank you Mr. Chavan & Mr. Singh. I have indeed shortlisted SBI Max gain loan. You have rightly said that SBI are offering the lowest rate with no prepayment / foreclosure charges. Apart from that they are also offering daily reducing balance facility which is beneficial.

    Sir, the amount I woud be saving on EMI would be used to prepay thus reducing my loan tenure as this amount is wholly considered as principal amount. This strategy was advised to me by SBI as well as someone else. Still want to think over it & get some figures before I take a call on the tenure. My idea is to have an EMI of around Rs. 55 – 60,000. And then make a prepayment of 1 lac every alternate month toward reducing my principal amount. Keeping my EMI constant I should be then able to complete my loan in a period of 7 – 8 years. I have worked this out only in theory & need some guidance in calculating to my satisfaction if indeed this is wise.

    Sir, as regards the CIBIL score, I do not have any outstanding loans nor any credit cards against my name. Do I still need to have a CIBIL score?

    Thanking you

  4. Biswa Singh says:

    Hi Farshid,

    Home loans are meant to be paid in 5 to 7 years otherwise it turns to be bad investment as the interest component that you pay in the whole tenure will be more than the cost of the flat itself.

    1. Its always advisable to go fro shorter tenure as you save huge amount of interest. But you should be able to afford the high EMI. If so then please go for shorter tenure.

    2. I think still you misunderstand that you can go for lesser EMI and save the extra amount to prepay the loan. Dear.. when you pay lesser EMI it means you loan tenure is more. When your tenure is more you pay more interest amount. So effictively whatever you save by paying lesser EMI you are paying the same as interest (Due to longer tenure and high interest component). Though you are targeting to pay the loan in 5 to 7 years still you are paying high interest component due to lesser EMI amount. Please don’t opt this stretegy.

    Any kind of loan is a burden and you should try to pay it as soon as possible and the best way is to make the tenure shorter and when you get enough money prepay it. If you want to save for your future then its best to control your expenses. But yes if you have real cash crunch then you can opt for lesser EMI. But your salary is decent enough so dont opt for lesser EMI.

    Regarding the home loan interest its expected to be less in coming quarter. You can wait until you dont nedd the loan. Please prefer SBI max gain loan. This is the best and least interest. Please read more about SBI Max Gain in this forum and the blogs written by Manish. Before approacing for loan you must have to your cibil score from http://www.cibil.com/ If your cibil score is less then you will not be able to get a loan. So get this score first….. All the best

  5. Sachin Chavan says:

    Farshid, Your strategy will only work when you get more interest on your saving than home loan. Stick to lesser tenure option as you will end less paying loan amount at the end.

    Choose daily reducing loan option and peferred to go with central banks as they offers such facility.

    Thanks

  6. Farshid Bokdawalla says:

    Good day Manish

    Totally agree with you when you say that I would benefit when I prepay more amount apart from my EMI amount.

    I am looking for a loan of between 55 to 60 lacs for a tenure of around 10 – 15 years. The EMI for the same is around 60 – 80,000 depending on tenure, amount, etc. My monthly take home is around Rs. 160,000. I am single at the moment and have no other liabilities apart from an annual insurance premium of 1.1 lacs & 1 lac towards my PPF. I expect to get married in the next year or two and would need to save toward that too. My intentions are to clear out the loan within 5 – 7 years at most. Keeping that in mind how would you suggest I go about it?

    1) Should I take a shorter tenure loan and be bound to a higher EMI?

    2) Should I take a longer tenure loan & have more money to be able to keep for future expenses & hope to save enough to be able to prepay more amount apart from your EMI amount?

    Also today’s newspapers say that home loan rates are likely to fall in Jan. Should I wait until then or proceed with the formalities?

    Thanks in advance

  7. Farshid

    your strategy will not help at all , when you will reduce the EMI , your tenure will anyways go up and it will go up with a great margin . then by prepaying , your tenure will anyways come down to the same level as it was in start . Note that when you prepay more amount apart from your EMI amount, only then you will benefit , With your strategy you are just paying the same EMI amount in a different way .

  8. Farshid Bokdawalla says:

    Thank you Mr. Singh for your reply and the links. I understand that I would be paying less interest on a smaller tenure. I am looking to repay my loan by prepaying it and finishing it off within 5-7 years at max. I was just wondering if, for example, instead of paying 12 EMIs of 1 lac each I choose to pay 12 EMIs of say 75K by increasing the tenure…I can use the 25K saved for each EMI (25K x 12 = 3 lacs) and pay 3 lacs as prepayment which will reduce my outstanding principal amount by 3 lacs. Would this in that case be beneficial than choosing a loan with a shorter tenure?

    I hope you could get what I’m trying to get across.

  9. Biswa Singh says:

    Its always suggested to reduce the tenure provided you are comfortable with the EMI. Less tenure means you pay less interest and save a huge amount. please go through the below link to get what i mean.

    http://www.caporbit.com/home-loan-tenure/

    http://articles.eco
    nomictimes.indiatimes.com/2012-05-03/personal-finance/31559174_1_loan-tenure-loan-borrowers-emi

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