POSTED BY March 29, 2011 10:46 am COMMENTS (24)

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Hi Manish & All,

I would like to know comment from all on below thought regarding homeloan.

I have always thought that it is always beneficail to pay upfront as much money as you have and take lesser home loan amount.

However looking closely into the numbers and calculation It seems taking home loan is much more benficial than making upfront payment.

Lets take example to make it clear…

Lets say I have to make payment of 20L to builder for home purchase and I have cash available with me around 5L apart from initial downpayment for booking and other stuff.

Now I have 2 choice:

1. Pay 5L and take home loan for rest 15 L

2. take home loan for 20L and invest 5L in some safe investment.(no risk)

**Calculations:**

**For Scenario 1: **

15L loan for 15 years @9% turns out to be ( as per calculator available on jagoinvestor.com) :

Total amount Paid : 2738520

Total Interest amount : 1238520 (45%)

Total Principle amount : 1500000 (55%)

**For Scenario 2: **

20L loan for 15 years @9% turns out to be ( as per calculator available on jagoinvestor.com) :

Total amount Paid : 3651300

Total Interest amount : 1651300 (45%)

Total Principle amount : 2000000 (55%)

**Difference in total amoutn paid = 3651300 – 2738520**

** = 912780**

**5L investment @8% for 15 years yields** ( as per calculator on jagoinvestor)

= **1586085**

**Gain = 6L+ in 15 year.**

plus we would have income tax benefit on the homeloan EMI if the tax law does not changes in future.

*For rising interest rate :*

*Loan@13% – Gain turns out to be around 3L.*

Based on the above calculations it appears to me that taking a home loan is much more beneficial than making the upfront payment if you have some money to pay upfront.

Please let me know what is wrong in this calculation ( if any) and let’s discuss this to explore the options.

ONLY Negative point I could make out is Having a Home Loan will not give peace of mind.

All comments are welcome.

Dear All

Homeloan has got some disadvanages too..

Below is my experience..

I bought a home for 40 Lakhs . I took home loan of 28 lakhs. 12 laksh saving i invested

Now after paying EMI of 30000 at interest rate of 10.25 % for the last 2 years my current outstanding Principle amount is 2730000

So after repaying around 720000 only around 1 laksh is deducted from the Principal amount.

If i want to sell my house also it is not valuing more than 42 lakhs. so i will get only around 15 lakhs in hand. which is loss for me. I am losing 4 to 5 lakhs.

In case if i lose Job and not able to sell my house i will lose all the money and left with nothing as bank will seize my house.

So be carful and take loans.

Value of house keep on increasing as we keep paying more interest. More than 80% of EMI component goes in Interest only

Thanks

Dev

@Amol,

You are right. In reality home-loan rate as well as fixed-deposit rate will change. I was illustrating an ideal case where home-loan remains fixed at 7.5, fixed-deposit remains fixed at 8%. The illustration was to underline the message that there is no golden law stating which one (more-loan or less-loan or no-loan) is better.

Thanks Asif, Nitin Gupta, CVRR. Brilliant discussion!! Here goes my take:

At 9% home-loan rate, the EMI difference between 15-lakh-loan and 20-lakh-loan for Asif’s example indeed comes to 5072. On that basis CVRR’s calculation is correct and it is sensible to pay upfront.

However at a lower home-loan rate of 7.5%, the difference reduces to 4635(I used the EMI calculator at apnaloan.com). The rest of the variables (5lakhs investible surplus, 15 year loan tenure, 8% fixed deposit rate) remain the same. Hence at a home-loan-rate of 7.5%, taking 20-lakh-loan does not remain that bad a proposition.

Hence, answer to the question (whether loan or upfront-payment is better) is “it depends”. At lower home loan rates it may make sense to take the loan even if you can pay it up.

@Shahid Hasan,

It is not possible to answer your question without knowing the values of all the variables (home-loan-interest, investment-interest, tenure-of-loan, loan-size, surplus in your hand). You will have to make the calculation and decide.

yes this is very correct, if calculations are correct, if tax rebate is not considered.

then only it will depend on interest rate of fd and rate of interest of laon that which way is better.

My openion is that FD rate will always be less than home loan interest if not then from where the banks will earn. So my conclusion is that making upfront payement will always be cheaper.

the conclusion may change if you choose some risky intvestment other than FDs

@Sambaran

agreed that at a lower home-loan rate of 7.5%, the difference reduces to 4635 but when you are taking example of lower home loan rate you should also consider the higher home loan rate.

In 15 years loan tenure the rate going to fall and go up year by year…in this case we should consider avg. rate which I think 9% is reasonable(or even 8 or 8.5 for that matter.)

One more thing, with the example given by CVRR Rs. 5072 were invested per month in FD at 8% rate

15 years is long duration

instead

if one choose to invest them in good MF then we can expect 10% return…in that case return is much more…around 21 lacs

This calculation is incomplete. How does it take into account the monthly EMI of 15 lakh vs 20 lakh.

EMI for 20,00,000 : 20285.33

EMI for 15,00,000 : 15214.00

In case of 15lakh you are saving 5071.33 extra every month as compared to 20 lakh loan.

Assume you had invested this amount in FDâs every month at 8% the you would be having 17,54,874.01 in accrued in Fixed Deposits.

So the correct calculation is

Scenario 1:

15L loan for 15 years @9% + 20285.33 per month (15214.33 in EMI + 5071.33 in FD)

Total amount Paid : 2738520

Total Interest amount : 1238520 (45%)

Total Principle amount : 1500000 (55%)

Total Fixed Deposits 8%: 1754874

Total Money Left after 15 yrs : 1754874

Scenario 2:

20L loan for 15 years @9% + 20285.33 per month (20285.33 in EMI)

Total amount Paid : 3651300

Total Interest amount : 1651300 (45%)

Total Principle amount : 2000000 (55%)

Total Fixed Deposits : 0

5L investment @8% for 15 years yields : 1586085

Total Money Left after 15 yrs : 1586085

So it is better to do upfront payment rather than take home loan.

You can do other calculations based on Home loan tax benefit, but remember that for high home loan amount it is remains constant at 30% of 1,50,000.

@ Venkat.

Very nice. That seems to be the final nail in the coffin of the argument. ð

Thanks.

when you take loan of 15 L, instead of 20L, ur EMI will be less. suppose EMI difference is 2000. Now when you are comparing these two scenario, for right comparison, you need to consider that in case of 15 L loan, user can invest this 2000 each month and at the end of entire process will get some returns.

so your calculation was not correct.

Dear Prabeesh, For your given example, Say after 5 Months, the actual Loan outstading is 14.75L Rs. whereas calculated outstading loan amount is 9.75L Rs. (due to 5L Rs. deposit in Max Gain account.).

In this xase, if you opts to withdraw full 5L Rs. from that Max Gain account, the interest ‘ll be charged on the 14.75L Rs. & not the original 15L Rs. as you have already paid 25K Rs. from your regular EMI repmt.

Thanks

Ashal

@asif/anand Please correct me if my understanding is wrong.

With SBI Max Gain .Assume i have HLoan of 15L and a surplus of 5L which i have put in Max Gain.In this case the interest will be calculated for 10L of my loan. Until the time i keep the money there?

What happens once i remove the money after 5 months? Does previous 5 Months Interest is also calculated and charged or they will charge only from withdrawal date?

If its later ,then i think its best option(i am not sure of tax implications here),because my money is yearning interest equal to Loan Interest which you will not get on a long run with FD(least risk).

If a person is ready to take good risk of putting that money in stock/MF then prepaying doesn’t make sense as on long term you can expect 10-12% from MF investments.

Prabeesh,

for your first question Ashal already explained.

for second one the investment in FD would generate as below:

5L investment @8% for 15 years yields ( as per calculator on jagoinvestor)

= 1586085

I think this 15L amount is much more than what you would save in home loan interest by putting money in that Max Gain A/c

Use calculators available at jagoinvestor.com & Try Calculating urself!

Asif

when you say that 5L investment @8% for 15 years yields ( as per calculator on jagoinvestor)

= 1586085

why dont you consider following case

if the home loan interest goes to 12% you are earning 12% interest on those 5 lacs in OD account(as now you are not paying interest of 12% on those 5 lacs which would otherwise become part of loan amount)

if the home loan interest becomes 10 or 8% likewise you are saving that interest on 5 lacs

saving 10 to 12 % interest on 5 lacs is more than earning 8% FD interest on 5 lacs

Amol,

The simple and strong difference is FD or similar investment – 5L @8% Works on the compounding Principle & HomeLoan EMI works on the Monthly reducing balance principle.

So for your argument it may not be exactly same as you explained. Can you please do calculation and come out with numbers as to how much you would be saving in home loan interest???

It would be easy for us to compare!

As per my calculation interest rate of 13% or more will make it equal. But the question is for how many years that 13% will be in effect? all 15 ?

Apart from this you would save in tax saving section! ( Of course after 2 years when you are back in India ð )

Manish & others,

Appreciate if you can put your valuable comments as well.

Sorry to bother you much… but I am still not convinced.

Could you please show some examples / calculations to make it more clear?

Dear Asif, I already know about HSBC & S&C’s similar product. Why I’m recommending for SBI?

Reason # 1 – The basic home loan rate is lower in SBI.

Reason # 2 – Both other banks don’t have the wide reach like the SBI in all over the country so people from all parts of India may get this Max Gain.

By th way – I’m a chemical engr. & working in a fertilizer manf. co. not in SBI. I’m associated with SBI as an individual customer only.

Now I’m sharing more , How I’m getting more bucks from this Max Gain?

My salary account is not with SBI (due to my employer’s tie up with another bank). The moment my salary gets credited to my salary account with that bank, I immediately transfer it to this Max Gain account. Now this Max Gain account is my primary account & all my investments as well as payments for credit card & other bills are paid from max Gain account itself. My SIPs are also linked with this Max Gain. There is more to it for EMi repayment, my normal SB account with SBI is used but I never kept money in that SB account for EMI. Using netbanking of SBI, the scheduling has been done to transfer EMI equal amount from Max Gain to SB account 2 days before EMI date.

Hope I’m clear to you now that how I’m getting more bucks for the money.

Thanks

Ashal

Hi Ashal,

the above home loan scheme described by you is not actually as good as it seems to appear.

I was reviewing HSBC Smart home loan option which also same as what you have described above for SBI max gain.

however, In this actually you loose out the interest & compounding power of money you put in OD account. NO interest paid by bank to you on that money!

it just lies there giving you flexibility to be take out anytime whenever needed. it will save money on interest calculation as well. but nothing more than that.

However when you take out the amount the same is being interest chargeable.

Instead if you put that money in simple FD with post tax return of 6.5% you would get Rs 1285921 in 15years. and you can break it partially or fully as and when the need arises.

why are you telling to look for SBI home loan here? Are you an agent? if yes then obviously you can not help.

but if No, then I would suggest you to please re-consider your home loan. do calculations and act accordingly. Any extra money should be invested in good investment products and should not be left to sit idle in OD account unless your requirement is to take out money and put it back on frequent basis.

P.S. – I might be wrong in my assumption and calculation, but so far I have not figured out anything wrong or heard so from anyone….

All comments welcome!

Dear Asif, For your given situation, I’ll ask you to go for 5L Rs. DP & 20L Rs. as loan from SBI. In this case the product ‘ll be Max Gain. I’m asking exclusively for Max Gain. Under this product, an overdraft account is also opened which is linked to your home loan. Any surplus amount kept in this OD account is treated as loan repayment for the period, the amount was in the OD acct & accordingly the interest ‘ll be charged only on the adjusted outstanding loan amount.

For your given example.

DP = 5L Rs.

Loan amount = 20L Rs.

Money kept in OD account of Max Gain = 5L Rs.

Hence effective outstanding loan amount = 15L Rs.

So interest ‘ll be charged only on this 15L Rs. amount.

You may ask what ‘ll happen if after 1 month, you withdraw say 1L Rs. from the OD account. In this case, the adjusted outstanding loan amount ‘ll be 16L Rs. – the principal amount adjusted from the EMIs paid till date.

FYI –

I’m personally using this Max Gain for my own home loan as well as mnay of my friends are also using it on my recommendation.

For more details on the product, please contact the nearest SBI branch or here itself.

Thanks

Ashal

Dear Asif & all others, I’m not doubting the calculation but all of you missed a simple point. For a property costing 20L Rs. @ 75:25 loan & down payment ratio or 80:20 ratio, the max. loan amount ‘ll be 15-16L Rs. only.

So in any case, not much or almost nil amount ‘ll be there to keep as investment.

Yes the calculation ‘ll be effective if in the above example, Asif has 10L Rs. ready with him & then only the question arise to go for 10L or 15L Rs. loan.

Thanks

Ashal

Hi Ashal,

Thanks for your reply.

However, in my question the 20L is not property cost but the loan amount is 20L.

Property cost is 25L and assuming 80% loan it comes out to 20L LOAN from bank.

Now the question is if you have some savings lying in FD or wherever to a value of 5L . what would be proftable & why?

to pay 5L upfront and take loan only for 15L? or take 20L loan and invest 5L?

Please comment.

Assumption: you have downpayment amount apart from 5L in discussion and also repaying capability for the increased EMI in case of 20L loan.

It is very simple. You should invest somewhere, where the returns are better than the interest rate of the home loan.

If the interest rate of home loan is 10% then you should invest in stocks/mutual funds where you should get more than 10% returns.

Anand,

I guess you did not read the question properly or I failed to explain properly.

here I compared Loan @9% and Loan @13 % with investment return @8% and the investment @8% ( less than the loan rate ) turns out to give more return than you pay for loan.

I think asif you are very correct what i concluded from all statements i will also do the same if i will take a home loan.

But i have one question for all if i have all money to pay the home cost than in that case also i should take a loan , i realy confused.

Although I did not cross-check your calculations, I will say that your thought process is correct. I did a similar calculation and opted to go for home-loan rather than paying it upfront.

Some points to take note of though:

1. Make sure that you are indeed investing whole of the amount in an 8%-9% instrument. For example, a fixed deposit of 8% is one-third less post-tax, hence it will not fit your requirement.

2. Constant vigilance is required on the interest rate that the bank is charging. At one point of time in 2008, my bank was charging me ~ 14% interest. I found that out only by looking at the statement. The economic newspapers were still quoting 11-12% at that time.