the best way would be to know the tax benefit scale, and then align your EMI according to it. Say for now you get 1.5L on Interest and 1L on Prinicipal .. so total of 2.5L. Make sure that (if affordable!) your EMI is around 20K. Is that correct pros ?
It is interesting to note that generally the INTEREST part being paid in the EMI is more than the PRINCIPAL part. why is it so? when the financier says that they are offering, say, 9% interest then arent they charing more interest during the initial years when the INTEREST is actually more than the PRINCIPAL amount.
RE:Why More interest
by Krishna Lakshman on Dec 31, 2005 02:05 PM Permalink
Yes, the interest will be higher than the principal in the initial stages of the loan repayment period. And for each subsequent EMI, there is will be a marginal reduction in the interest component and a marginal rise in the principal component. That is because the interest [calculated on a monthly reducing basis] is on the outstanding principal every month. So lets say the loan is for Rs. 15,00,000 and the rate of interest is 8%. The EMI for 20 years would be Rs. 12546.60. The interest for one year at 8% for Rs. 15,00,000 is Rs. 1,20,000 and for one month it is 1,20,000 / 12 = Rs. 10,000. So from Rs. 12546.60, Rs. 10,000 goes towards interest and the remaining Rs. 2546.60 towards principal repayment. Next month your outstanding principal is Rs. 15,00,000 - Rs. 2546.60 = Rs. 1497453.40 And the interest at is calculated on this amount which comes to approx Rs. 9983, which is less than your interest component in the previous month [Rs. 10,000]. Your EMI however, remains the same which means your principal component of the EMI for the current month is now Rs. 12546.60 - Rs. 9983 = Rs. 2562 which is slightly more than the principal component last month [Rs. 2546.60]. Hope this helps.
RE:floating rate interest
by Krishna on Dec 31, 2005 01:42 PM Permalink
Yes, there'll be a penalty if you pre-close the loan. The standard is 1.5% of outstanding principal, but it varies from bank to bank and can be negotiated [prior to signing of the loan docs].
RE:floating rate interest
by Krishna Lakshman on Dec 31, 2005 01:55 PM Permalink
Purely speculative. No one can predict how the rates will be 5,10,15,20 down the line. And fixed rate does not mean really fixed. There's a clause that says if the money market conditions change, the fixed ROI will be subject to change too. However, there are some lenders that provide PURE fixed viz. SCB, HDFC. ICICI used to have the clause mentioned above, but now they are offering PURE fixed by striking the clause in the agreement. Hope this helps.
I fully agree with your advice setting out various options for repayment of loan. Loan is generally given by the Lending Bank against Credit Card. When the Banks are doubly benefitted (1) by way of loan interest and (2) Credit payment.
If you make transactions against credit card, the total amount outstanding is shown adding EMIs. Unfortunately if there is delay in making payment and roll over payments against credit card transactions, the lending Bank charges the interest on total outstanding, late fee, etc. also on the EMI whereas two accounts are different and payment date should be different & separate bills should be raised. Whereas the Banks take it as one account, for the obvious reason of extracting more and more payments from the borrowers by way of interests and late charges, late fee, etc.). Is their system of charging of innterest and other charges fair & genuine.
RE:Home Loan
by Krishna Lakshman on Dec 31, 2005 01:47 PM Permalink
No, its not necessary. But the bank will insist to have the person to whom the property is registered apply as a co-signee/applicant.
If the prepayment is not charged then we can take for more tenure/time/period. Since we the interest part is fixed for any tenure (because interest rate is fixed) we can commit for least possible principal and do more principle at any time with out any penalty.
RE:Home Loans
by Krishna Lakshman on Dec 31, 2005 01:44 PM Permalink
Doesnt matter if you pay Pre EMI or Full EMI, if the construction of the apartment/home is complete in the financial year one pays the EMI, s/he will be eligible for tax rebate on the interest amount.
