Home Loan – Increased EMI

POSTED BY manikacp ON April 18, 2012 1:18 pm COMMENTS (8)

Hi

I have a home loan of 28 lkhs & the EMI also is approx 28000. This is for 25 years but considering this rate of interest i’l end up paying 70 lkhs to the bank and i don not want to keep the loan for so long. I had decided to increase my EMI from 28 to 48 lkhs. Do you think this would make sense.
Or i can make bulk payments in a year which could be quarterly, monthly or yearly.
Then one of the financial advisers told me not to increase the EMI instead open SIP for 8 years & repay one bulk amount.
But my worry is weather the SIP will give me more interest or increasing the EMI would bring the PA down & i’l be able to save interest.
Please help me on this.

Regards:
Manika

8 replies on this article “Home Loan – Increased EMI”

  1. Hi Manika

    May be late to respond, but my answer to Manika’s Question would be it would be better that he shall increase the EMI as the interest is calculated is on reducing balance and more we pay the principal is reduced, instead of paying in lump sum.
    If your home loan interest rate are fixed say @ 7-8 % it’s better to open Recurring etc., but if it is floating any ways your recurring / FD interest rate shall lower than your home loan rate, then it is better to increase your EMI

    SO following table can be followed

    Fixed rate for Home Loan Below 9% οƒ  Invest in RD currently @ 9.5%
    Floating Rate of Home loan οƒ  Increase your EMI.

    Remember if you want to invest in Markets you should be confident that the IRR you will earn should be greater that Home loan interest then only that option shall be excercised.

    Important: Some bank charges a penalty for prepayment please check the clause before repaying.

    Regards
    Tanmay Thakoor (tanmay2000@gmail.com)

  2. Dear Manika, how about a middle path. Increase your SIP from 28K to 38K & invest remaining 10K in to the instrument of your choice. This way you are in middle path & not totally on the mercy of Mr. Market to provide you enough returns so that your earnings are more than your expenses.

    Thanks

    Ashal

    1. Ramesh says:

      Ashal,

      You mean to say increase EMI.

      In my opinion, half-measures are usually not a good choice.

      1. Dear Ramesh, please do not look the query on pure financial wisdom. There is a part of emotions also involved. My house is not mine due to that high loan amount. To overcome that guilt, the person in question wants to prepay early. Also as per normal suggestion, if the person do invests for next 8Y & Mr. Market just throws some nasty surprises at the time of withdraw or just before that, the guilt of this person ‘ll be very high.

        That’s why I asked to take a middle path.

        Thanks

        Ashal

        1. Ramesh says:

          Well put.

          But why not then have investment in say FD / debt instruments and not rely on Mr Market (equity-head). Isn’t a RD for say 8 years a good option in the present scenario, just to avoid equities.

          Also, consider, guilt works both ways. Say, there is significant appreciation in the equity markets in next 5 years, then the person will rue the decision to prepay, when that amount would have helped in creating a big asset. In such a case, a proper non-emotional decision, yes well-informed, is the best bet.

          Pre-paying ANY EMI-type of loan is 99% bad, because of disproportionate front-payment of the interest component. Pre-paying by increasing the EMI actually does not make the house your own. It does only after complete payment.

          In the end, it depends on the individual.

          1. Dear Ramesh, I ‘m fully agree with your last line –

            In the end, it depends on the individual.

            Thanks

            Ashal

          2. manikacp@gmail.com says:

            Thanks Ashal & Ramesh….both your inputs would be really helpful for me.

  3. Ramesh says:

    If you will put the extra money in another asset, it will give you more returns. So, better get your extra money in any asset class, be it debt or equity or mixed, as per your convenience and outlook.

    Why do you want to give the bank extra money and that too faster. That is not a wise decision.

    Your financial advisor’s comment is also good. Wait for 8 years or so, and then if you feel you have enough money to foreclose, then maybe you can do that.

    Consider the point, that initially you pay only the interest (for first 5 years or so), and only in later years, you actually pay the principal back. By prepaying, the bank does not get lesser interest. And if you include the future value of money into calculations, your actual amount of money outgo is also lesser (Eg the present value of Rs 100 after 8 years is about Rs 58 presently, if you consider an inflation of 6.5% – in other words, if you pay Rs. 58 now, that amounts to Rs. 100 8 years afterwards). Let the bank be happy in having more interest later on. πŸ˜‰

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