Need some help on the math - am I making a mistake in analysis?

If one takes a 50 Lakh loan at 10% per annum interest and 15 year repayment period, one gets an EMI of 53,730. You pay 46 lakhs interest.

If one takesa 50 Lakh loan at 10% per annum and 25 year repayment period, one gets EMI of 45,435. You pay 86 lakhs in interest.

Difference in EMI of 8295 Rs per month.

Now if you save the 8295 per month, you get 29 lakhs by compound interest at 8% after period of 15 years.

So 46 plus 29 = 75. Hence excess interest paid between years 15 and 25 is only 11 lakhs.

Now if you put the 29 lakhs in 8% simple interest you get about 20,000 per month as interest, which can further reduce your EMI from 45000 to 25000 approx.

If you save the 8295 per month for entire 25 years, you get 80 lakhs !



So the question is - which loan is better - the 15 years loan or the 25 years loan?

We are assuming that the 8295 is saved in FD instead of equity and ignoring the depreciation of money value which is more in 25 than in 15 years.

Any thoughts?
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  • Dear Venky,

    Its all about magic of compounding , i will go for 15 year tenure ,will finish loan in 15 year and put 53000(EMI amount) for next 10 year in any safe instrument which gives u 8% ....u know how much it will give 53000 for next 120 month with magic of compunding ...around 97 Lacs..
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  • Originally Posted by evasnis
    Dear Venky,

    Its all about magic of compounding , i will go for 15 year tenure ,will finish loan in 15 year and put 53000(EMI amount) for next 10 year in any safe instrument which gives u 8% ....u know how much it will give 53000 for next 120 month with magic of compunding ...around 97 Lacs..



    Thanks.

    I agree.

    But what about another option. Take 25 year loan. Close it after 15 years.

    Is that better?

    (Unfortunately I am on mobile so no desktop for loan calculator for outstanding principal which I anyway have to locate and download an excel tool)

    Of course the whole point of this exercise is to see if one can invest 8295 in equity instead of 8% debt and at what return will 25 year loan become better than 15 year loan (over 10% is obvious but how much is the delta).

    And the point that next few years might give better kick from stocks that later on when one can close the loan early.

    Also a position that Rupee will depreciate more in 25 years than in 15 by both inflation and against dollar.
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  • For the above mentioned loan amount for 25 years loan tenure, you would actually pay approx 70L of total interest in the first 15 years. That is approx 80% of the interest due on 25 years loan. In last 10 years would have principal amount as major component.

    If you try to pay this loan in 10 years your emi would go up by 13k only. But your total interest outgo would come down to 29 lakhs .

    25 years loan tenure eventually becomes 35 years loan tenure after adjusting for various rate fluctuations.

    RA


    Originally Posted by Venkytalks
    Need some help on the math - am I making a mistake in analysis?

    If one takes a 50 Lakh loan at 10% per annum interest and 15 year repayment period, one gets an EMI of 53,730. You pay 46 lakhs interest.

    If one takesa 50 Lakh loan at 10% per annum and 25 year repayment period, one gets EMI of 45,435. You pay 86 lakhs in interest.

    Difference in EMI of 8295 Rs per month.

    Now if you save the 8295 per month, you get 29 lakhs by compound interest at 8% after period of 15 years.

    So 46 plus 29 = 75. Hence excess interest paid between years 15 and 25 is only 11 lakhs.

    Now if you put the 29 lakhs in 8% simple interest you get about 20,000 per month as interest, which can further reduce your EMI from 45000 to 25000 approx.

    If you save the 8295 per month for entire 25 years, you get 80 lakhs !



    So the question is - which loan is better - the 15 years loan or the 25 years loan?

    We are assuming that the 8295 is saved in FD instead of equity and ignoring the depreciation of money value which is more in 25 than in 15 years.

    Any thoughts?
    CommentQuote
  • Yes, it will be more fruitful provided equity works in that time...

    I am also confused after reading this article...Actually , it need more finanical discipline and one should know how to sit on profit and start investing through SIP mode..

    Honestly speaking , builder try to suck all profits from investor , one should look for RE only incase of real end user.. No point to investment atleast in apartment specially in Greedy NCR market..

    Mutual funds or Real estate, which is better? - Moneycontrol.com



    Many of us are very comfortable with real estate as an asset class. Real estate is tangible and we feel we have full control on it. Most of us believe it to be less risky and think the return is highest and unmatched by any other asset class.
    Thousands have personally seen their real estate investments grow manifold. A Rs 15 lacs property bought in Thane in 2000 is probably priced at Rs 75 lacs today. Is it not phenomenal?
    There is always demand for real estate and historically the prices have been going up sharply. There is hardly been any instance of prices of properties dropping drastically. This makes real estate the most obvious investment option. The only reason one may not have made investments in real estate is lack of funds.
    On the other side people have different perceptions about mutual funds. They believe that mutual funds are very risky. Investing in mutual funds or stocks is akin to . Returns generated in mutual funds are less than in real estate.
    What is the fact? Is real estate actually the best or a mutual fund is a better option?
    We will broadly look at two parameters to establish the truth; Returns and risk.
    Returns in real estate:
    Let us take the earlier mentioned example. Property bought in 2000 at Rs 15 lacs is worth Rs 75 lacs today. Growth of Rs 60 lacs in a matter of just 12 years, fantastic! Isn’t?
    Ok, let us mathematically check at what rate it has grown. We know that bank deposits give - 9% per annum. How do you find how much has the property given every year? We can use the compound annual growth rate (CAGR) or use XIRR function in MS excel.
    The property grew at the rate of 13.17% for the period Jan 2000 to Jan 2013.
    Now, assume one had invested Rs 15 lacs in HDFC Top 200 G for the same period. He would have made Rs 1.29 crs at a rate of 18%.
    Large cap diversified equity funds tend to give higher returns compared to real estate in the long term.



    Originally Posted by Venkytalks
    Thanks.

    I agree.

    But what about another option. Take 25 year loan. Close it after 15 years.

    Is that better?

    (Unfortunately I am on mobile so no desktop for loan calculator for outstanding principal which I anyway have to locate and download an excel tool)

    Of course the whole point of this exercise is to see if one can invest 8295 in equity instead of 8% debt and at what return will 25 year loan become better than 15 year loan (over 10% is obvious but how much is the delta).

    And the point that next few years might give better kick from stocks that later on when one can close the loan early.

    Also a position that Rupee will depreciate more in 25 years than in 15 by both inflation and against dollar.
    CommentQuote
  • Originally Posted by rushilarora
    For the above mentioned loan amount for 25 years loan tenure, you would actually pay approx 70L of total interest in the first 15 years. That is approx 80% of the interest due on 25 years loan. In last 10 years would have principal amount as major component.

    If you try to pay this loan in 10 years your emi would go up by 13k only. But your total interest outgo would come down to 29 lakhs .

    25 years loan tenure eventually becomes 35 years loan tenure after adjusting for various rate fluctuations.

    RA

    Good point.

    Do you have an outstanding principal calculator?

    If we take ball park 80% figure for principal outstanding after 15 years on 25 year loan, then 40 lakhs is outstanding after 15 years.

    29 lakhs you have anyway earned on 8% return. So with 11 lakh you close the loan at 15 years.

    Would need to check a calculator for the math. Would have paid more interest than 15 year loan.

    But greater flexibility for the 8295 a month extra available.
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  • Venky,
    You pay Rs40 lakhs extra as interest.
    House remains as bank property for 10 more years.
    You pay higher EMI for 15 years and loans gets completed when you probably will be in more senior a position in some company and your saving potential increases instead of allowing EMI to hamper you.
    Finally last but not least important is that one can look for a new investment in RE which you can probably keep 10 years as repayment period.
    I would go for 15 year period only.
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  • Originally Posted by evasnis
    Yes, it will be more fruitful provided equity works in that time...

    I am also confused after reading this article...Actually , it need more finanical discipline and one should know how to sit on profit and start investing through SIP mode..




    The property grew at the rate of 13.17% for the period Jan 2000 to Jan 2013.
    Now, assume one had invested Rs 15 lacs in HDFC Top 200 G for the same period. He would have made Rs 1.29 crs at a rate of 18%.
    Large cap diversified equity funds tend to give higher returns compared to real estate in the long term.


    Dont get confused bhai. You were totally right.

    For all practical purposes 15 years is the ideal loan period.

    10 years is too less for most.

    20 years onwards interest component balloons.

    You are also totally right that EMI is more disciplined than stocks.

    The whole purpose of my exercise is coming up with ideas trying to beat the system. For example. Suppose you take 25 year loan. But you prepay 8295 of principal each month! What does that do to your loan?

    Or when stocks are down you buy stocks with 8295.

    But when stocks are bubbling you take out from stocks and prepay the loan. And also prepay with the 8295 which you are saving every month in period after stocks enter bear market.

    Just thinking of many scenarios.
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  • Originally Posted by vaibav123
    Venky,
    You pay Rs40 lakhs extra as interest.
    House remains as bank property for 10 more years.
    You pay higher EMI for 15 years and loans gets completed when you probably will be in more senior a position in some company and your saving potential increases instead of allowing EMI to hamper you.
    Finally last but not least important is that one can look for a new investment in RE which you can probably keep 10 years as repayment period.
    I would go for 15 year period only.

    Agree about the next property idea. Good point.

    But when your salary increases the EMI for old loans starts feeling negligible. Doesnt affect saving.
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  • Venky,
    46000 EMI is quite substantial expenditure
    or most senior person,because this may not be the only expenditure -children education may be also coming up in big way during that period.
    Anyway the way I look at it is lesser loans the better.
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  • Originally Posted by vaibav123
    Venky,
    46000 EMI is quite substantial expenditure
    or most senior person,because this may not be the only expenditure -children education may be also coming up in big way during that period.
    Anyway the way I look at it is lesser loans the better.

    At 1 lakh salary 46000 is a big chunk.

    But 15 years later with 3 lakh salary 46000 will be negligible.

    25 years later with 5 lakh salary 46000 will be just 10% of salary.

    But i agree that paying so much interest bank gains more than you.
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  • Venky,
    The argument and discussion can go to eternity.
    If EMI is Rs46000 right now and it is floating rate- EMI may vary -price inflation needs to be taken into a/c and growing needs of education,medicals etc
    Best policy and simplest policy is clear off loans at earliest and live debt free.
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  • True Vaibhav.

    I have gone through my life without ever taking a single loan

    I managed to get my hands on the loan calculator.

    If you take 25 year loan of 50 lakhs then at the end of 15 years you have 34,40,000 outstanding principal. So about 70% of the principal is outstanding.

    Since we calculated 29 lakhs from 8% on the 8295 of EMI saved every month, the difference is about 5 lakhs or so.

    If you invest the amount at 10% per annum i.e. same return as the bank loan rate - then 8295 amounts to 34,75,000 - which means the difference is exactly same as the loan rate.

    So if you can beat the loan rate of 10% by even 1% the difference will amount to about 38,14,000 i.e about 4 lakhs you gain by beating the 8 % by 3% and the bank loan by 1%.

    This needs thought - it might be better to take loan for 25 years and invest the EMI difference in equities and beat the 15 year loan, even a conservative return of 11% on the equity side will result is a 8% return on your capital deployed of 50 lakhs.
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  • ""This needs thought - it might be better to take loan for 25 years and invest the EMI difference in equities and beat the 15 year loan, even a conservative return of 11% on the equity side will result is a 8% return on your capital deployed of 50 lakhs.""
    This kind of strategy requires knowledge,determination and ability to stick to investment routine and achieve objectives.
    Human psychology will not permit one to be so focused-problems,demands for funds etc will come up and derail your program.
    Simplicity in investment is what I feel is the safest way and equally productive.
    Complex products/investment strategy do not necessarily give you better yield.
    CommentQuote
  • Originally Posted by vaibav123
    ""This needs thought - it might be better to take loan for 25 years and invest the EMI difference in equities and beat the 15 year loan, even a conservative return of 11% on the equity side will result is a 8% return on your capital deployed of 50 lakhs.""
    This kind of strategy requires knowledge,determination and ability to stick to investment routine and achieve objectives.
    Human psychology will not permit one to be so focused-problems,demands for funds etc will come up and derail your program.
    Simplicity in investment is what I feel is the safest way and equally productive.
    Complex products/investment strategy do not necessarily give you better yield.

    Agreed. Simplicity works best.

    But at least now I understand the mechanics of a 25 year loan vs 15 year loan.

    If the amount is big enough the discipline might come. Or by buying a 15 year off line SIP matching the loan also one can hope to beat the system by automation.

    Other advantages of a 25 year loan is keeping the possibility of further loans alive because your EMI is not maxed out - so if need comes for say a loan against property within a few years of taking home loan, your salaey still has a margin for greater loan.

    All this came about because somebody at work asked me about 15 vs 25 year loan.
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  • Venky,
    No further intention to prolong this topic,but I know of several people who have stopped SIPs due to sudden dips in market,financial issues.
    But if you get into a 25 year loan,you cannot call of paying your EMI.
    25 Year loan or 30 year loan is too long a period to commit yourself when life is at times, so uncertain that you cannot predict what will happen literally tomorrow.
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