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POSTED BY ON November 12, 2011 6:23 pm COMMENTS (11)
What would happen / possible financial ways to sell a house bought with 65% housing loan (cost rs.80 lacs) after 4 yrs. of repayment (total repayment period 20 yrs.) , sale forced due to job loss, and not having EMERGENCY money to pay the future installments, though during 4 yrs. the cost of house is appreciated @50% ? The buyer could be with idea to buy with the similar loan arrangement, but with other institute. Would the owner would get profit , apart from using the house for 4 yrs. or loss/?
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@ashal
thank you as always for replying in details!
Dear Bharat, Here is the answer for your query –
In case of a normal home loan – the part prepayment ‘ll bring down the outstanding loan immediately (for the discussed example, 5L prepayment ‘ll bring down the o/s loan amount to 43L). Accordingly the portion of principal repayment in each subsequent EMI’ll increase.
The borrower has the option to either keep EMI same (which ‘ll reduce the over all loan repayment term) or the loan term same (which ‘ll reduce the EMI amount). Reducing loan term is more beneficial as the interest outgo in this case ‘ll be lower if the cashflow permits to keep the EMi same.
For the overdraft linked home loan (SBI max Gain for example – disclosure – I’m using the same for my own home loan), keeping those 5L Rs. in the overdraft is beneficial as the money in OD account ‘ll be treated as repayment of the loan & accordingly the interest outgo ‘ll be lower till the time the money remains in OD account.
So the final answer is – It ‘ll depend on the individual requirement, what is beneficial for the borrower.
Thanks
Ashal
time and again i like to extend the discussion in the subject, but before that i like to correct my last comment , last sentence ‘e.g. for a same amount of loan for 20 yrs period the interest amount would be same as the interest for 10 yrs’ loan in say 10th emi, but the repayment part of principal would be different, provided the balance of principal at end of 9th emi is same.’ now the further query:
in cited case, instead of foreclosing the loan after 4 yrs., if the person wants to prepay some amount, say 5 lacs, then would it be credited against balance of principal, and the installment(emi) would be reduced keeping total repayment period unchanged or the repayment period would be reduced keeping the a/m of emi unchanged , after recalculating accordingly? of course the prepayment penalty would be paid, if applicable.
which is better for the client , to reduce the emi or to reduce the repayment period?
the reply could be :it may be different for different person and the situation.
however i read in some discussion of the forum that if such loan is connected to overdraft account, and if such prepayment money is credited in that account instead of prepayment ,it would be more beneficial. can anyone (read ashal/justgrowmy money!) explain how it could be?
Dear Bharat, I’m happy for the fact that I was able to help you. Please keep on posting, asking.
Thanks
Ashal
@ashal
thank you for reply clearing my misconception due to wrong mental arithmetic! what large amount of interest is paid due to large principal amount, and not due to long period of repayment as i mentally thought of! of course the emi is calculated on basis of duration and principal loan amount, but then the bifurcation in interest and part of principal is depending on the intervening period between the emi. e.g. for a same amount of loan for 20 yrs period the interest amount would be same as the interest for 10 yrs’ loan in say 10th emi, but the repayment part of principal would be different.
thank you again!
Dear Bharat Shah, Please clarify what do you want to recalculate. I think you are asking that as the loan was paid in 4Y (regular EMI + one time loan closure amount), the bank or financial institution should recalculate the break up of interest & principal for those 20L Rs. paid already in 4Y’s EMI.
If my understanding is correct for your query, you are wrong for the fact that –
For the given interest rate, the amount of interest in EMI ‘ll remain same calculated on the basis of outstanding principal at the time of payment of EMI.
For example – in the given case of 52L Rs. loan, the interest paid in the first EMI was for 52L Rs. loan amount & not for any other reduced loan amount.
Please clarify, your query.
Thanks
Ashal
ashal’s further comment encourages me to ask further for more clarity on the subject:
as @justgrowmymoney replied, only @4 lacs would have paid towards principal amount and rest @16 lacs or so would have gone for initial 4 years’ heavy payment of interest. and it is understood , as it would have been calculated on basis of 20 yrs loan payment schedule.
but now the loan is being prepaid, would not the principal and interest be recalculated on 4 yrs period, and accordingly modified by the lending institute? of course it would charge prepayment penalty, if applicable.
Dear Bharat, I also read http://www.subramoney.com daily & glad to know that the post there was able to force you thinking.
Please keep on posting & asking.
Thanks
Ashal
@justgrowmymoney and @ashal jhauhari
thank you both for detail replies. as such, the question is hypothetical based on one real story post on subramoney.com. however this could happen to my dear one, i afraid. and so i ask,.
Dear Bharat, For your case, there ‘ll be 4 party involved in the house deal.
1. You – the seller
2. Your bank/Financial Institution
3. The Buyer
4. The Buyer’s bank/FI
In case the buyer is ready to go with your existing bank/FI, the transaction ‘ll be very smooth. Otherwise, you & your buyer both may face some hardships from respective banks/FIs.
I’m not saying that selling the house is not possible but I’m merely warning you for the initial hardships. The foreclosure of this loan may invite prepayment penalty from your bank/FI.
For the agreed price of house say 1.2 Crore Rs. your bank ‘ll demand the outstanding loan amount + foreclosure charges. Rest money is yours to enjoy.
From taxation point of view, the capital gain due to sell of your house are liable to Tax @ 20.6% rate for the indexed purchase price.
In case you want to discuss it in detail, please ask dear Manish for my e-mail ID.
Please be assured, I’m not going to ask any money or reward from you in exchange of any help to you
Thanks
Ashal
Bharat,
1) If you show you are deperate to sell your house the buyer/agent may try to take advantage. Try to portray this as if you are investing in a larger property/business hence the urgency to sell and raise cash.
2) Given that you had ~ 52 lacs of loan before 4 years you may now have paid off some 3 – 4 lacs. (ie) outstanding = 48 lacs. When you sell your house the bank will secure the first 48 lacs and release your documents.Assuming you can sell the house for 1.2 crores the remaining 72 lacs is your to keep. NOw overall you have 55 lacs of long term gain (since you have held the property for more than 3 years). You need to invest these proceeds in another house or invest in few govt bonds like the NHAI etc.
3) You are usually eligible for a 3 month payment holiday in most home loans.If you have had a good payment history the bank may be willing to extend you a 6 month payment holiday, Assuming you may be able to secure a job in the next 6 months you may want to try this option as well. But note that since the EMI will be ~ 50,000 and in 6 months if you cannot find a job then the outstanding loan will balloon by ~ 3 lacs. Nevertheless this is a very good option to try.