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POSTED BY ON August 15, 2013 12:26 pm COMMENTS (6)
I am planning to purchase a under-construction flat.
Scenario 1:- After the initial down payment, I am considering a home loan for 38L. My original thought process was to take a loan for a tenure of 15 years, the EMI comes to Rs 41,770 @ 10.40% ROI. I’m certain ( or atleast most certain) that I will make part payments of at least 1L every year starting 2 years from the loan start date.
Planned part payment schedule.
100000 6/6/15
100000 6/6/2016
100000 6/6/2017
100000 6/6/2018
100000 6/6/2019
100000 6/6/2020
With this payment structure, my total payment ( Principal + Interest ) comes to Rs 56,14,489. The tenure reduces from 180 months to 135 months keeping the EMI constant.
Scenario 2:- Now, then, if I plan to take a loan for 20 years,then the EMI would be Rs 37,684 @ 10.40 % ROI. If I plan to take this route, I can save Rs 41,770 – 37,684 ~= 4,000 per month. Since, I can afford to 15 year tenure, I think I can save this Rs 4,000 every month. If you use this Rs 4,000 in RD for every three years @ 8.75%, then the returns every three years are Rs 1,65,019. This amount is utilized for part-payment every three years.
So, the earlier planned part payment schedule becomes
100000 6/6/15
265000 6/6/2016
100000 6/6/2017
100000 6/6/2018
265000 6/6/2019
100000 6/6/2020
With this payment structure, my total payment ( Principal + Interest ) comes to Rs 54,28,828/ The tenure reduces from 240 months to 145 months keeping the EMI constant.
PS: The total amount paid may slightly be off the home loan calculator calculated value, since I thinking to do Full-EMI during the construction phase of the apartment, thereby cutting some portion of the Principal. This is applicable to both the above scenario’s.
I understand the tax component on the RD returns, but, I want to ignore that for now. Is my calculation flawed or does it make sense to go ahead for 20 year tenure? Is there anything missing, that I should have taken into account?
Please share your thoughts!
Madhan
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You cant invest money for lower interest rate and pay higher interest and save money. Basic maths. I know you would need numbers to prove that and here they are.
Other way of looking at calculation. You paying same emi (the 4000 is just going to RD instead of loan which you anyway use later for loan payment). It takes 135 months in first case and 145 months in second case. So you pay 10more months of emi and one more part payment of 100000.
You forgot to add part payments done to the total payment
In first case it will be 135*41770+1300000 (13 partpayments of 100000 each)
in second case it will be 145*37684+1400000+144*4000 (ignore RD interest and just add 4000)
Thanks. I understand my flaw of not adding the partpayments. But, i just want to mention that the partpayment schedule indicates part payments are made only for 6 years starting 2015 to 2020. Therefore, the part payment will not total upto 13L and 14L for 15 years and 20 years respectively. This will give new dimension to the calculation as the RD is also only for 6 years and not more.
So, for 20 year tenure, earlier quoted amount 54,28,828 + 9.3L = 63,288,28
15 year tensure, earlier quoted amount 56,14,489 + 6L =62, 14, 489
Though, the 20 year loan is slightly more costly. It is my investment of 4K for first six years that is helping me make this 3.3 L (9.3 -6.0), hence should it be considered as additional expense ? Sorry, if this is getting too confusing. All I want to say is that , if I go for 15 year loan, I would pay 41K, and if i go for 20 years, it would be 37K. So, with the same 41k, i am using 4k for first 6 years to compound it to cut down the principal. So, i am not paying anything more than 41k but still making a profit ( not adding the prepayment principal, since the difference is made up by nothing additional from my pocket)
I am not planning to make part payment beyond 2020, because my calculation states that i wont cut down principal significant enough than the profit I can make out of the 1L.
My point is simple and doesn’t require calculations actually. You have a loan at 10.4% and you want to invest at 8.75%. You rather part pay loan immediately. The only valid reason for investing when there is a loan is if you expect higher rate of return than loan or if you value liquidity more than anything. Profit is impossible.
And how are you making profit? Even your calculations in the last post showed you pay about 1L more in a 20 year loan and part paying RD invested money (only till 2020).
If you don’t want to add prepaid amount to your payments, you are not doing complete calculation.
The only reason one goes for higher tenure even when can afford lower tenure is to have liquidity. Which actually can be easily achieved by taking a loan like SBI smart loan where you can park that surplus in loan account rather than RD and have liquidity also if the need arises.
Thanks for the response, really appreciate it 🙂
Dear Madhan, your calculation is OK. Personally I w’d prefer a lower EMI payout so that in case something happens to my repayment capacity, I can sustain EMIs from my emergency fund for a long term.
Thanks
Ashal
Dear Mr. Madan,
If you wish to repay your loan and be debt free at the earliest, you can go for the 15 year loan since you can afford it.
But, as calculated by you, the 20 year period will help you save close to Rs. 2,00,000 with the part payment schedule.
However, do keep in mind any charges you may have to pay if you take a fixed rate loan.
This article in Hindustan times, which we think might assist you in making a decision:
http://www.hindustantimes.com/business-news/UtilityBytes/Home-loan-prepayment-helps/Article1-861275.aspx
Regards,
Credexpert
http://www.credexpert.in