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.
