Home Loan story…
I HAVE BEEN TOLD TO SAY…THIS IS A HYPOTHETICAL EXAMPLE –
ANY resemblance of this to the real world should not happen..
Viewer: Sir I have a home loan of Rs. 45 lakhs payable over 20 years at a (floating rate) of 11.75%. A new Aggressive Bank is offering me a New Loan of Rs. 45 lakhs at a rate of 11%. However this will involve paying a 2.1% prepayment charges.
What would you suggest?
Answer given:..You will spend about 90,000 as prepayment, but you will save about 0.75% p.a. for the next 20 years (=22,500 * 20 years) whereas you will pay only Rs. 90k as prepayment charges. So definitely worth it.
Will the readers pick holes in the story please?
Ketan Amin
We pay interest on principle amount remaining. That will decrease overtime as we will be paying EMI. So, The interest amount will not be the same throughout loan period. Interest amount will be very less in last years of loan period. So, it may not help that much by changing home loan to another bank.
Sreedhar
1. Major part of EMI will go towards interest for initial years. This will get reset again if he moved to a new lender as it will be new loan
2 .De – Mortgage charges from existing bank and Mortgage charge with the new lender. (Costs 50 k in Chennai)
3. Loan processing charges
4. Finally what’s the guarantee that new lender will not raise the interest rate?
Shashank
If the person in the above case has Rs.90k, wouldn’t it be better to invest that amount in equities for the next 20 years ??
hari
It is not mentioned whether the interest rate offered by the second baker is floating!. If it’s fixed then for sure banker will become rich and we must buy shares of such bank.
aditya modi
Pre payment charges is calculated on loan outstanding…!!!
Not known now, when he or she may get a pre payment opportunity.. Jobs are not eternal nOw!!
Gaurav
The Home loan insurance (sold along with HL) is usually not transferable.
Anam
Namusays
1.
Current emi 48766 (240 months 45lakhs 11.75%)
New emi 47377 ( 240 months, 45.90 lakhs 11.0%)
Not much difference.
2.
What is the guarantee that the new aggressive bank wont resort to aggressively increase the floating rate in future ?
Shashank
How about investing that 90k in equities (Direct equity or Mutual fund), and letting it grow for the next 20 years ?
Abhijit
My questions to the viewer:
Q1: What if the aggressive bank changes your interest to that offered by your current bank or even more than that in near future?
Q2: Have you checked if there is any conversion offer from your existing bank? (I have such an offer from HDFC to convert my existing rate of 11.75% to 10.50% by paying a nominal fee of Rs. 6000/-). Consider this if available.
Q3: Apart from pre-payment charges, are you needed to pay processing fees and all that stuff? Have you calculated that?
subra
the biggest crime is to say you will SAVE 22,500*20 but you are paying only Rs. 90k. Reducing a pv from a fv is a regularly done fraud.
yes the insurance premium paid has gone waste…
assuming that it is a floating rate, you need to know the dates of reset….
there maybe other flaws too,,,,,
charu
I had been through when I was paying 11.75% where another bank was charging 10.25% for new customers. thought so much about it and did not shift. Reasons:
1. The transfer cost not just processing fees, but also some stamp duty’s which was a significant amount
2. No guarantee that the other bank wouldn’t load the exiting customers once I become one (existing customers of the other bank was charged at 11% or so). Floating rates keep fluctuating
3. My earning also increases year by year and hence it is better to reduce the tenure of the loan by paying higher EMI or keep prepaying lump sum every now and then and close the account as soon as possible
4. Possibility (even though probability is very less) of missing the documents while shifting from one bank to other is there (heard of some cases where mother documents are missing)
I decided not to shift to other bank. Later, my bank itself gave me an offer to reduce the interest amount by paying minimal amount. I closed my home loan in total 5 years
4.
subra
charu
do not agree with point no. 3 nor with the decision to pay off the loan in a lesser period…
Justin George
If you keep 90k in a fixed deposit (no risk involved) for 20 years it would be more than 7 lakhs. If you invest in equities ther is chance of more returns, but you have to take small risk.
Justin George
I have put a comment below this article about making fixed deposit of 90k for 20 years. And I saw message that awaiting for moderation. Now my comment not appeared means Subra don’t want to publish. I would like to know what wrong with fixed deposit option. There is many other options but fixed deposit also not a bad idea if some one dont want to take any risk. You could pay 90k to loan amount also a good idea. This is your website and you have all the right to keep my comment here or not. Only reason for me to write here is you ask for it.
hari
Hi Justin,
to earn more than 7 lac one has to invest 90K in an FD which yields 11% !!! which itself is very risky. Usually banks do not give such high rate and you have to deposit with NBFC. Moreover the interest earned will be taxed as per the individual tax slab. In the above case the individual appears to be in the 30% bracket and post tax returns would be 7.7% i.e. he gets only 4lac 23 thousand.
Alternatively do SIP in an equity MF for 12 months [ 7.5K each] stay invested for 19 years you will get 9 lac 22 thousand and entire corpus is tax free !!!!
Justin George
Hi Hari, Are you sure mutual fund investment will give fixed returns? My understanding is it’s depends on market and the stocks they select to invest
Justin George
In that case better pay off loan using that 90k. It will defenitly act as a return of 11.75%
charu
May I know why closing home loan early is not a good option if the interest rates are between 10%-12%? If tax benefits and other mode of investments are the reasons, I am fine (that time I was only a low risk investor). Are there any other points I am missing?
Abhijit
Hi Justin,
Are you sure that Home Loan interest rates are going to be 11.75 or more in next 20 years? (We are at the peak of the interest cycle).