I liked the article - it clearly clears up the myth for the suspecting loan seekers I ran the NPV on both scenarios & for Pre-EMI I got NPV of 21,98,582 whereas for ADF I got NPV of 24,28,028 - by taking a constant 10% discounting over the full horizon. This works clearly well for Fixed rate loans. However the difference being less in both NPV\'s if the case were a Floating rate & say the rates were higher in 1st 10 yrs & then lowers in last 10 yrs (mainly last 2 yrs), I suspect the difference would be too small or even less attractive !! Worth simulating
I liked the article - it clearly clears up the myth for the suspecting loan seekers I ran the NPV on both scenarios & for Pre-EMI I got NPV of 21,98,582 whereas for ADF I got NPV of 24,28,028 - by taking a constant 10% discounting over the full horizon. This works clearly well for Fixed rate loans. However the difference being less in both NPV's if the case were a Floating rate & say the rates were higher in 1st 10 yrs & then lowers in last 10 yrs (mainly last 2 yrs), I suspect the difference would be too small or even less attractive !! Worth simulating
I liked the article - it clearly clears up the myth for the suspecting loan seekers I ran the NPV on both scenarios & for Pre-EMI I got NPV of 21,98,582 whereas for ADF I got NPV of 24,28,028 - by taking a constant 10% discounting over the full horizon. This works clearly well for Fixed rate loans. However the difference being less in both NPV's if the case were a Floating rate & say the rates were higher in 1st 10 yrs & then lowers in last 10 yrs (mainly last 2 yrs), I suspect the difference would be too small or even less attractive !! Worth simulating
Consider a scenario: In ADF, builder gives 8% discount and the project takes 2 yrs to complete and the total loan period is 15 yrs
Point by the author is about investing the interest saved in first 2 years. (note: you are not going to make any more investments into this investment after the first 2 years)
My point is: The monthly difference in EMI (because of the 8% offer provided by the builder, your loan amount as well as EMI should be lesser) in the years from 3rd to 15th years; If you invest this money on a month-on-month basis and do compound interest calculation, this will exceed money saved in the pre-emi option i think.
I am not a financial expert, but with simple calculations, i think ADF is better.
Anyone has any thoughts on this??? Especially the author.
I just booked a flat and I am in the same confusion; ADF vs Pre-EMI... Your responses are welcome.
That is roughly equals to 6.728 of today's amount.
It may look very lucrative but lets do a little time travel but.... in the past, Not 20 years just 10 year
10/2009 price of potato :Rs28 per Kg
10/1999 price of potato :Rs2.45 per Kg
price changed more then 10 times ... do i need to think about 1989 ??
we bought a piece of land 20 years back and it coasted Rs 20,000, today it worth Rs 30,00,000 .. increased by how much ...let me guess ...150 times.
Think about anything and mostly you will be surprised to know how much difference in cost of living has come in last 10 years.
So even if your money is 6.728 times after 20 years. Did you make money or lose money ?
Pre-EMI is safe only if builder don’t complete the work & run away or you have lost your source of income and not in a position to pay the EMI. Both the cases whatever money paid is gone & you would have paid less amount with Pre-EMI compare to ADF
Bottom line ADF is good for Builder but you should threat him with Pre-EMI & get a discount. That way its a win win situation for both of you. But If some one wins .. some one have to lose .. so who lost ? Its not you or the Builder .. obliviously its the bank .. coz you will be taking less loan with the discount price.. hence less interest paid to the bank..
This explaination in rediff analysis is mis guidance to the customers and in favour of HFCs. Ultimately what matters to the customer is that how much they pay for their loans.
Pre - EMI is a burden. How can rediff miss the tax benefit of 1.5 lacs (interest comp) and 1 lac (principal comp) which one gets if he chooses ADF option. In Pre EMI one can only claim over a span of 5 years which is a long term. Also pre - emi doesnt reduce your Principal outstanding loan amount. All pre-emi is contributed to Interest component of the Loan amount. In ADF option , principal and interest both get subtracted
Re: I dont agree with Rediff's analysis
by Murali on Jan 26, 2010 01:07 PM Permalink
Thats not correct. If you opt for Pre emi, the balance principle should be invested somewhere and when you actually start the emi, pay this accumulated money to the loan itself. So, your principle also gets reduced. I think, pre emi is always better and profit making.
Re: I dont agree with Rediff's analysis
by Murali on Jan 26, 2010 01:08 PM Permalink
Thats not correct. If you opt for Pre emi, the balance principle should be invested somewhere and when you actually start the emi, pay this accumulated money to the loan itself. So, your principle also gets reduced. I think, pre emi is always better and profit making.
Re: I dont agree with Rediff's analysis
by Murali on Jan 26, 2010 01:07 PM Permalink
Thats not correct. If you opt for Pre emi, the balance principle should be invested somewhere and when you actually start the emi, pay this accumulated money to the loan itself. So, your principle also gets reduced. I think, pre emi is always better and profit making.
Pre - EMI is a burden. How can rediff miss the tax benefit of 1.5 lacs (interest comp) and 1 lac (principal comp) which one gets if he chooses ADF option. In Pre EMI one can only claim over a span of 5 years which is a long term. Also pre - emi doesnt reduce your Principal outstanding loan amount. All pre-emi is contributed to Interest component of the Loan amount. In ADF option , principal and interest both get subtracted
Re: I dont agree with Rediff's analysis
by Meetu Meetali on Feb 22, 2012 12:21 AM Permalink
You need to remember that Sec 24 benefit of 1.5 Lacs & principal of upto 1 lacs under sec 80c is only available upon possession of house. So for uder construction property even if you pay EMI you can't claim it
Re: I dont agree with Rediff's analysis
by Murali on Jan 26, 2010 01:06 PM Permalink
Thats not correct. If you opt for Pre emi, the balance principle should be invested somewhere and when you actually start the emi, pay this accumulated money to the loan itself. So, your principle also gets reduced. I think, pre emi is always better and profit making.
Re: I dont agree with Rediff's analysis
by Murali on Jan 26, 2010 01:07 PM Permalink
Thats not correct. If you opt for Pre emi, the balance principle should be invested somewhere and when you actually start the emi, pay this accumulated money to the loan itself. So, your principle also gets reduced. I think, pre emi is always better and profit making.
