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POSTED BY ON November 26, 2012 1:17 am COMMENTS (3)
Hi,
I am planning to take home loan of amount 10 lac from SBH which having nil prepayment charges , So I thought its better to take long term home loan of 20 years , for which EMI will be lesser as compare to 10 yrs term EMI, although my finacial situation is capable to pay EMI for 10 yrs term and I know that I can clear this within 5-6 years,
Could you please help me on this , which loan terms is better in my situation … 10 or 20 yrs ?
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Hi
As I understand it, it is always beneficial to take a home loan with the largest tenure. This results in reducing your monthly EMI and easing your cash flows – resulting in more investable funds per month. If you do not have any investment option, you always have an option to prepay upto around 25% of your home loan per year without prepayment penalty and reduce your principal payment. By this way, you would have the flexibility and liquidity to make other investment decisions and do a prepayment when you want rather than a compulsive monthly payment (via a higher EMI) if you take a short duration loan.
Hope it helps.
Small correction –
So, you would have paid an extra 1,28,439.12 To the bank in case of a 20 year loan and not 10years as mentioned above!
Consider a loan of 25 Lakhs for 25years and you will be paying an EMI say, 25k.
20 Years (240 Months)
EMI 25804.71
Yearly Interest Amount – 184656.52
Total Amt Along with Interest – 6193130.4
10 Years (120 Months)
EMI 34437.5
Yearly Interest Amount – 163250
Total Amt Along with Interest – 4132500
So say, you pay Interest for 6 years.
20 Year Loan:
Total Paid = 18,57,939.12
Interest Paid = 11,07,939.12
10 Year Loan:
Total Paid = 24,79,500
Interest Paid = 9,79,500
So, you would have paid an extra 1,28,439.12 To the bank in case of a 10 year loan. If you had invested the difference in yearly premium of 21406.52 in an instrument with 12%. You would have accumulated 198260.
Beginning of Year End of Year
———————————–
21406.52 24093
45499.52 51210
72616.52 81731
103137.52 116082
137488.52 154745
176151.52 198260
So by looking at this, you would have infact paid 1,28,439.12 + lost 1,98,260 in terms of getting interest. So a total loss of 326699.12.
*I am assuming my calculations are right!
*I am assuming you are paying off the loan/closing the loan at the End of the 6th year as a lump sum.
*You might have to check what would happen if you keep paying off additional amount every year.
Also, do consider not “repaying” the loan early considering the interest paid can be used as Tax saving instrument. You could probably save more by Investing the amount you are planning to repay into an investment of 12% ROI and check whats the difference in amount.
All these are my views, lets get the views of others as well!