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Home loan - 15 years or 20 years with part payment?

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Home loan - 15 years or 20 years with part payment?

Last updated: September 9 2013
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  • Home loan - 15 years or 20 years with part payment?

    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.

    So, there appears to be 2L benefit for 20 year loan.

    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
  • #2

    #2

    Re : Home loan - 15 years or 20 years with part payment?

    Good.

    Sounds good. Your calculation is correct and bring you light if you are discipline in month RD!!!!

    Comment

    • #3

      #3

      Re : Home loan - 15 years or 20 years with part payment?

      Madhan,
      To me calculation looks flawed, in 15 years calculation only EMI outflow for entire tenure of 135 months which you claim to be reduced tenure after prepayments (I have not crosschecked it) is 56,38,950 and after prepayments of 1L per year this would increase by 11L.

      While for 20Years calculation EMI outflow for 145 months 54,64,180 + 4000 per month for RD which you would anyways be paying for home loan = 60,44,180 + prepayment of 12L.

      Now considering prepayments of 1L similar in both cases, still makes 20 years loan costlier by 4L

      My simple logic without going into any calculation is, if you invest 4000 in RD where interest rate is 8.5% and you cut payment to home loan account where interest rate is 10.5% you are anyways loosing 2% per annum on the sum in consideration. So it cannot be cheaper by any which way leaving apart tax complications.

      Comment

      • #4

        #4

        Re : Home loan - 15 years or 20 years with part payment?

        Yes Agree ! your opportunity cost of fund will be higher in investing in RD

        Originally posted by himrathore View Post
        Madhan,
        To me calculation looks flawed, in 15 years calculation only EMI outflow for entire tenure of 135 months which you claim to be reduced tenure after prepayments (I have not crosschecked it) is 56,38,950 and after prepayments of 1L per year this would increase by 11L.

        While for 20Years calculation EMI outflow for 145 months 54,64,180 + 4000 per month for RD which you would anyways be paying for home loan = 60,44,180 + prepayment of 12L.

        Now considering prepayments of 1L similar in both cases, still makes 20 years loan costlier by 4L

        My simple logic without going into any calculation is, if you invest 4000 in RD where interest rate is 8.5% and you cut payment to home loan account where interest rate is 10.5% you are anyways loosing 2% per annum on the sum in consideration. So it cannot be cheaper by any which way leaving apart tax complications.

        Comment

        • #5

          #5

          Re : Home loan - 15 years or 20 years with part payment?

          Further clarification

          Thanks for the response. I see one fundamental flaw in my calculation, that is NOT adding up the part payment principal to the total loan amount. So, for a 20 year loan the part payment totals upto 6L and for 15 year loan, the part payment totals upto 9.3 L.
          So, in essence, the 20 year loan is becoming slightly more expensive than the 15 year loan.

          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)

          Having said that, I have few questions still in my mind

          Originally posted by himrathore View Post
          Madhan,
          To me calculation looks flawed, in 15 years calculation only EMI outflow for entire tenure of 135 months which you claim to be reduced tenure after prepayments (I have not crosschecked it) is 56,38,950 and after prepayments of 1L per year this would increase by 11L.

          Can you help me understand how? Please remember the part payment goes only from 2015 to 2010 - 6 years.

          Originally posted by himrathore View Post
          While for 20Years calculation EMI outflow for 145 months 54,64,180 + 4000 per month for RD which you would anyways be paying for home loan = 60,44,180 + prepayment of 12L.

          Now considering prepayments of 1L similar in both cases, still makes 20 years loan costlier by 4L
          Again, 4000 per month is only for first 6 years and nothing beyond that. Also, i am not sure how the 12L prepayments comes into picture.

          Originally posted by himrathore View Post
          My simple logic without going into any calculation is, if you invest 4000 in RD where interest rate is 8.5% and you cut payment to home loan account where interest rate is 10.5% you are anyways loosing 2% per annum on the sum in consideration. So it cannot be cheaper by any which way leaving apart tax complications.
          Agreed, but the is RD for only first 6 years, and using that RD's matured every three years to cut down the principal.

          Let me know your thoughts, appreciate your response.

          -Madhan

          Comment

          • #6

            #6

            Re : Home loan - 15 years or 20 years with part payment?

            Sorry for being late, I didnot get much time to analyze your situation and provide my view.

            Now here are my iterations:

            Considering Your loan amount is 38L and tenure in question is 15 and 20Yrs, First talking about 15Yrs option:
            - Total repayment done in 20Yrs with Rs 41770 of EMI = Rs 7,518,576

            Second option for 20 Yrs:
            - Loan balance after 6 yrs on paying EMI of Rs 37,684 = Rs 3,327,885
            And RD Balance of monthly payment of Rs 4,086 8.5% = Rs 384,752
            After payment of RD amount to loan account = Rs 2,943,133

            Total Payed including RD and EMI = Rs 3,007,433

            - Which reduces tenure for further loan by 131 months EMI of Rs 37,671
            Total Outflow for remaining tenure = Rs 4,934,853

            - Total Outflow in Option = Rs 7,942,286

            As explained 20Yrs option would be costlier by 4.26L after customisation of 6Yr RD payment. Home loan interest rate considerd for the calculation is 10.4% consistent through tenure.
            Hope I am able to match your illustration, let me know if I missed anything. Or if you need any other option to be part of the calculation.
            Last edited September 9 2013, 11:39 AM.

            Comment

            • #7

              #7

              Re : Home loan - 15 years or 20 years with part payment?

              One more thing if you go with RD for complete tenure and pay Rs 37,671 as EMI and Rs 4,086 as RD for whole loan tenure. In that case 20Yrs loan would be costlier by Rs 18,000 with all that pain of transfering money and IT implcations.

              That is also because of interest rate difference between loan and RD.

              Comment

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