RE:Re: Taking a home loan? Take pre-EMI
by adroit on Jul 16, 2006 08:27 PM Permalink
For 20 year term it is very reasonable to expect a weighted average return of 10% on your portfolio.
There are some basic fundamental disconnects with your hypothesis; A) If the lending rate is 8.50% p.a. then how will a deposit rate be 10% p.a. ? B) In a Cash down (ADF), generally developers will give a discount on the basic cost of approx. 6 to 8% -which has not been factored in cash flows. C) The difference between PRE EMII & EMI does no accrue in month 1 as you have shown in your illustrations. The gestation period is of 24 months as per your assumption and each month that difference accrues for the first 24 months.
Need less to say let us keep out the complexity of present/ future value etc away from the general public.
The best option is a Tranche EMI - do some research on the concept and interpolate it.
I think Home Loans are a complex financial tool which also has IT sops hence publishing articles which are incomplete like this one are misleading.
RE:Taking a home loan ? Take Pre-EMI
by adroit on Jul 16, 2006 08:24 PM Permalink
Hi!
a) Deposit rate of 10%. We think for a 20 year term it is pretty reasonable to expect a weighted average return of 10% on the portfolio.
b) Cash discount point has been considered at the end of the article. But not considered in computation table.
c) actually, initially the difference is more & then it goes on reducing. We have used averages for simplification.
d) IT Sops.actually we should have included one important point. Due to the wrong marketing by the HFCs, people are under tpeople are under the impression that they get tax benefits on ADF and they do not get tax benefits on Pre-EMI. Actually, tax benefits are independent of mode of financing. Tax benefits depend only of the completion of construction.
e) Tranch EMI Vs Pre-EMI. Both are more or less similar with the difference that in tranch EMI repayment starts after first disbursement is made. In purely finacial terms, Pre-EMI is slightly better than tranch EMI.
I went through your article on pre-EMI. It is indeed helpful. Till now, I was planning to take a pre-EMI, more out of compulsion rather than choice. Now, I shall go in for the same without any resentment for having to pay extra!
Thanks a lot for the information! Please keep up the good work of providing such eye-opening tips!
I agree with Adroit. Pre-EMI is better if the construction period is more than 2 years. The main thing most of the people forget is that there is no tax benefit during construction period. Hence, if you start paying EMI under ADF scheme there may be serious cash flow problems especially if you are on a tight budget.
It's a good article: first of its kind. But it did not look at the tax implications.
In case of Pre-EMI, till the construction is completed and handed over to the buyer, the buyer cannot claim the Interest paid ( Pre-EMI) as part of Tax deductions.
I wonder how the ADF payments are treated . Are they eligible for tax discounts? or else, will the buyer had to wait for handing over?
I think author has forgot one big aspect of home loan, which is the tax benefits. When u are going for ADF, ur tab benefits will be more for that period. And who knows aftre few year those benefit may not remain. SO it always better to start ur full EMI as soon as possible.
RE:Not go for Pre-EMI
by adroit on Jul 16, 2006 08:03 PM Permalink
Please note that the tax benefits on home loans are independent of scheme of financing. It is a misconception that you get tax benefits under adf. Please note that tax benefits start only from the year inwhich construction is completed. It does not matter whether you have taken adf or Pre-EMI.
I took Pre EMI to make sure that builder will not trouble me. Anyhow the builder is good(NCL Homes Ltd., Hyderabad) and finished the apartment with quality and in time to my satisfaction.
