[rags.singh]

Found this link https://www.switchme.in/calculator/prepayment which gives you a good idea of how much interest will be saved (and/or tenor reduction) when you prepay a loan. You can chose whichever month you'd like to prepay the loan in (partially/fully).

So there would always be some interest saving when you chose to prepay a loan. The call that needs to be taken is what are prevailing interest rates at the time of the prepayment. If your fixed rate loan is at say 7.5% while FD rates have gone up to 8%, then you are better off (subject to taxation of the FD interest) parking the money in FD. If substantial part of the interest has been repaid, and the interest rate on the loan is still competitive, then its better to let the loan run its course.

[Ragavsr]

Originally Posted by BLACNWYTE

See the difference? The bank got you to pay more and then used the money you repaid before end of tenure,

The interest you are paying in the first year about 1.7 L is 6.82% of the loan amount of 25L. Just services the interest for the 1st year. As the principal amount keeps reducing, the interest amount also keeps reducing and more proportion of the emi goes towards paying the principal.

In short, the bank does not charge interest for 20 years when you prepay a loan in 2 years.

[BLACNWYTE]

Originally Posted by Ragavsr

In short, the bank does not charge interest for 20 years when you prepay a loan in 2 years.

I might not have expressed properly what I was meaning to say. I'm just saying, if I repay the loan after 2 years which is on a 20 year tenure, I'm losing on the interest already paid. Bank wont reduce my already paid interest from my remaining principal amount. In effect I would have paid 6.82% interest, like you pointed out, for the initial principal which is more than the interest I would otherwise have to pay for a 2 year loan.

I'm not a big fan of pre-closing loans, if I don't get an option of doing it from the first month onwards (even then I won't be sure about it). I take loans if and only if they are absolutely necessary and when I do, I let the EMI run its course. No pre-closing, period. if I get additional money in between, I think about investing options or help me purchase any other essential item without loan.

I get what you are telling by bank don't over charge us. I'm telling we are losing if we pre-close the loan after two years. My logic is based on the assumption that (for simplicity I'm considering yearly bullet payments);

1st year EMI is part of principal + interest on initial principal for 1 year.

2nd year EMI is part of the now diminished principal + interest on the remaining principal for 1 year.

At the start of 3rd year, you pre-close the loan by paying remaining principal.

So, essentially you paid more interest for the money borrowed. If you are planning to pay additional amount towards the principal so that the interest component reduces, then it's well and good, but I'm still not on board with this, as I have already stated my inclination towards continuing with EMIs and investing the additional amount. My reply was specifically for pre-closing a 20 year tenure loan in 3rd year. If my logic seems flawed, then please ignore my reply.

P.S.: I'm not adept in calculating interest and EMI, I'm basing my answer on what the HDFC site projected the EMI split ups will be.

[CarJunki]

Loans backed by the asset also have liability angle in the event that any unfortunate incident happens or there is an earning impact, thus leading to default. The liability of car loan is limited to repossession the car alone. Liability of home loan (or top-up home loan) puts a liquidation possibility on the property. In most of the cities in India, house property will be valued higher than a car.

This mix and match is a bad idea because the risks are getting amplified in case there is a default or similar happening. No amount of interest differential can mitigate the collateral damage if something unfortunate happens.

So for a lower valued toy why risk a higher value asset?

[Entsurgeon]

Originally Posted by CarJunki

The liability of car loan is limited to repossession the car alone. Liability of home loan (or top-up home loan) puts a liquidation possibility on the property. In most of the cities in India, house property will be valued higher than a car.



So for a lower valued toy why risk a higher value asset?

While I agree to the point you make, home loans these days have a mandatory term life cover. Which means for a 20 year 20L loan, you are made to buy another 50k worth of term loan that covers exactly such a risk. There s no such provision for short to medium term loans like car loan.

[rags.singh]

Originally Posted by Entsurgeon

While I agree to the point you make, home loans these days have a mandatory term life cover.

Life insurance cover with a home loan is not mandatory and is in fact unethical on part of the banks to push. You should just refuse to accept this. Bank has taken a call on the property, if anything happens to the borrower, their recourse should only be to the property. Having a life insurance assigned to the bank just makes it easier for them to recover their outstanding loan rather than taking possession of the house and trying to sell it which may take a long time and the outcome may not be certain.

When I had taken a home loan from SBI, they tried to push for life cover but I refused and they agreed. IMO, no one should agree to assign the life cover in favor of the bank.

[livetodrive]

Can a home loan top up be compared with using money from OD (Over Draft) account like SBI Maxgain ?
If yes, then the pros and (mainly) cons should be same for both I think.

[kiku007]

Originally Posted by BLACNWYTE

I'm attaching a screenshot for the EMI break up of Home loan by HDFC for a tenure of 20 years.

If you see the split up of interest and principal part in the first two years, you will notice that about 70% of the payment is towards interest part. Now this interest is calculated for the entire 20 year period and then split.

Now after 2 years the bank gives you an option to pre-close the loan, and since there is no penalty you happily close it at a reduced interest in bulk payment. But have you really? Remember the first two year interest payment? You have already paid the bank more than the interest you should ideally have paid for what now effectively has become a two year tenure loan. Table two below show, what ideally should have been the interest you pay for a 2 year tenure loan.

See the difference? The bank got you to pay more and then used the money you repaid before end of tenure, to disburse fresh loans. It's a win-win situation for the bank. What we can do is, select the home loan as per our convenience and let it run its course. The amount you plan to pay towards foreclosing can be utilised for better investment options to get good returns that negate your home EMI interest. Also, till the home loan lasts, you can claim tax rebate under Section 24 (I guess this is the correct section).

I'm not an investment expert and this is just my personal opinion.

Originally Posted by BLACNWYTE

I might not have expressed properly what I was meaning to say. I'm just saying, if I repay the loan after 2 years which is on a 20 year tenure, I'm losing on the interest already paid. Bank wont reduce my already paid interest from my remaining principal amount. In effect I would have paid 6.82% interest, like you pointed out, for the initial principal which is more than the interest I would otherwise have to pay for a 2 year loan.

I'm not a big fan of pre-closing loans, if I don't get an option of doing it from the first month onwards (even then I won't be sure about it). I take loans if and only if they are absolutely necessary and when I do, I let the EMI run its course. No pre-closing, period. if I get additional money in between, I think about investing options or help me purchase any other essential item without loan.

I get what you are telling by bank don't over charge us. I'm telling we are losing if we pre-close the loan after two years. My logic is based on the assumption that (for simplicity I'm considering yearly bullet payments);

1st year EMI is part of principal + interest on initial principal for 1 year.

2nd year EMI is part of the now diminished principal + interest on the remaining principal for 1 year.

At the start of 3rd year, you pre-close the loan by paying remaining principal.

So, essentially you paid more interest for the money borrowed. If you are planning to pay additional amount towards the principal so that the interest component reduces, then it's well and good, but I'm still not on board with this, as I have already stated my inclination towards continuing with EMIs and investing the additional amount. My reply was specifically for pre-closing a 20 year tenure loan in 3rd year. If my logic seems flawed, then please ignore my reply.

P.S.: I'm not adept in calculating interest and EMI, I'm basing my answer on what the HDFC site projected the EMI split ups will be.

I'm sorry but this has to be most incorrect financial advice I've read in a long time.

I have a habit of pre-closing loans and I have saved significantly on interest payments. But let's leave that aside and look at actual numbers.

Loan amount: Rs.20,00,000
Interest rate: 12.75%
Tenure: 20 years.
Monthly payment: Rs.23,076.23
Net interest paid to the bank in 20 years: Rs. 35,38,295.69
Cumulative interest paid to the bank at the end of 2 years: Rs.5,04,203

Let's assume if the Bank allows the borrower to pre-close the loan at the end of 2 years and the borrower does that. The borrower saves around Rs.30,00,000 on interest. That's what you should be comparing and not comparing that against the interest paid for a Rs.20,00,000 loan on a 2 year tenure and come to a conclusion that I'm wiser paying Rs.35,38,295 interest!!!

Even small extra payments every month go a long way in closing the loan sooner and saving on interest costs.

P.S: If you are a financial wizard who can pay 35L to the bank as interest on a 20L loan for 20 years but make profits which are greater than the 35L using the prepayment amounts then you can ignore this post.

[BLACNWYTE]

Originally Posted by kiku007

I'm sorry but this has to be most incorrect financial advice I've read in a long time.
Even small extra payments every month go a long way in closing the loan sooner and saving on interest costs.

I hear you and I understand.

But, hear me out for a minute and if this is stupid logic then please ignore. I'll take the same 20 lakh example. By the end of 2nd year a minimum of 18 lakhs will be outstanding as principal. If I'm to put that 18 lakhs into a decently performing MF (read annualised returns of say 10 % which is the barest minimum of a decent MF) rather than pre closing the loan and continue with the loan repayment for next 18 years. Yes I'll pay 35 lakhs interest + 20 lakh principal. However my MF at the end of 18 years now is 1 Cr. Even with 30% IT on MF returns, I'll have around 75 lakhs, which is a good 20 more than that I have paid for the loan. Similarly, for the preclosing principal installments. Invest in SIPs for the period of loan.

When I started to invest in MFs, I had looked up the past performances for 10 years, and I arrived at the conclusion that keeping an MF for a longer term, say more than 10 years is better. Now with MFs giving good flexibility of choosing/ switching portfolio after a brief lock-in periods is also beneficial. Coming to inflation part, it affects both the loan and the end amount of MF. With loan, the 25k EMI now will be of reduced value after 10 years and I know that the 1 Cr 20 years hence is not the 1 Cr of today. But I don't think there will be another way to beat inflation than MF/Stock market. None of the conventional saving methods beats inflation IMHO.

Please ignore this if my logic is faulty.

[Ulysses]

[quote=Entsurgeon;4907509]

1. Top up amount offers no tax benefit.
Tax benefit will only work if you opt for a larger home loan and lower margin using your previous savings to buy a vehicle.

Home improvement loan ( a kind of top up on home loan), is eligible for income tax deduction under both sec 23A (interest) and 80C (principle) subject to overall eligibility.

[Entsurgeon]

[quote=Ulysses;4915148]

Originally Posted by Entsurgeon

1. Top up amount offers no tax benefit.
Tax benefit will only work if you opt for a larger home loan and lower margin using your previous savings to buy a vehicle.

Home improvement loan ( a kind of top up on home loan), is eligible for income tax deduction under both sec 23A (interest) and 80C (principle) subject to overall eligibility.

1. Top up loan offers no tax benefits.
1a. Home improvement loan is not a top up loan and you are right its eligible for tax benefit. An improvement loan is spcifically for home improvement and one needs to give estimate of expenses for same. It would work if you were planning to spend your savings on home improvement but you use that saving to buy a car and borrow for improvements instead. Its definitely better if someone is in that situation. Most people are not.

[Ulysses]

[quote=Entsurgeon;4915487]

Originally Posted by Ulysses

1. Top up loan offers no tax benefits.
1a. Home improvement loan is not a top up loan and you are right its eligible for tax benefit. An improvement loan is spcifically for home improvement and one needs to give estimate of expenses for same. It would work if you were planning to spend your savings on home improvement but you use that saving to buy a car and borrow for improvements instead. Its definitely better if someone is in that situation. Most people are not.

Check this recent article in ET (https://economictimes.indiatimes.com...67320968.cms); it says top up loan is also eligible for tax deduction. I've checked this with my CA.

In fact any kind of loan is eligible as home loan if there is document evidence (e.g. I purchased a land in Ooty, and could not get home loan for land purchase because it was outside city limits. So I took a personal loan for part financing it, and got tax benefits for that after attaching necessary documents as evidence).

[Entsurgeon]

[quote=Ulysses;4915546]

Originally Posted by Entsurgeon

Check this recent article in ET (https://economictimes.indiatimes.com...67320968.cms); it says top up loan is also eligible for tax deduction. I've checked this with my CA.

In fact any kind of loan is eligible as home loan if there is document evidence (e.g. I purchased a land in Ooty, and could not get home loan for land purchase because it was outside city limits. So I took a personal loan for part financing it, and got tax benefits for that after attaching necessary documents as evidence).

While you are absolutely correct in what you are saying, home loan top up is eligible for tax deduction u/s 24(b) and 80C only if it is used for –
Acquisition/construction of a residential property.
Renovation or repair of such property.
Such a claim should also be backed up with valid receipts and documents.
Its thus not relevant to the purpose of this thread imho.