[rags.singh]

Couldn't find an existing thread on this topic hence creating a new one. I am trying to decide between the 2 options, so if anyone has been in a similar situation, would appreciate their inputs.

Home loan top-up is available at 8% with a fee of about 5-6k (and mortgage charges) and for a tenor of upto 15 years. This would mean a much lower EMI but flexibility to prepay at any point of time. But on the flip side, it would mean adding more liability to your asset. Are there any tax benefits too on the interest that one pays for home loan top-up?

On the other hand, car loans are currently available at 7.6% (fixed for 7 years) with nil processing fee and an option to prepay after completion of 2 years. The only security bank gets is the underlying car, so in case you are unable to pay the EMI for whatever reason, the best the bank can do is repossess the car. Monthly EMI would be higher (1.5x) as compared to the home loan top-up option hence the confusion.

Please share your inputs if anyone has been through a similar dilemma.

[AZT]

I won't comment about the interest rate part but as i understand, home loans are eligible for tax deduction under section 80 C. If you take it on the name of a female / senior citizen then you also get better interest rate from govt banks. Found the below article on home loan tax benefits.

https://cleartax.in/s/home-loan-tax-benefit

[samee_arian]

I had a similar idea and know one of my friends going this route while he bought a pre worshipped car. I think it will make more sense in that case as ROI for pre owned cars is much higher. As far as tax deduction is concerned, I learnt from the bank that a top up loan on a home loan is not considered a home loan but a personal loan linked to home loan, so don't think one can avail any tax deduction on interest paid or payment of principal amount.

[aargee]

I don't know your intention for loan; if it's to buy the next gadget/new shiny toys, I will say none!! Defer your purchase (unless life threatening), save the EMI through Bank/PO RD & buy with cash.

[andafunda]

Bank of Baroda loans are available at 7.3% floating with no prepayment penalty. I just did the process. Took 2 days. Great experience!

[Entsurgeon]

Here are my inputs on the topic. I tried to be as comprehensive as possible. The true decision could only be made after understanding the basics- wealth creation, assets, liabilities, returns on investments etc. So pardon me if it feels I am digressing but each individual case is different and right decision would mean a cursory knowledge of at least a few things I've listed below.

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.

2. Evaluate your car buying budget and loan repayment capability carefully.
Having a 20 year loan on a liability that will last much shorter is against financial wisdom.
You may not be in a position to replace your car if you went over board with your budget. This point is regards the EMI you can afford in case of car loan vs home loan top up. An EMI of 1000 per month would let you borrow 60-70k for 7 years tops. Same amount would let you have a good 150k INR for 20 years. The wisdom is not to evaluate your budget by your capability to pay EMI. Instead, set your budget for car as per your capability/earnings and then go for a home loan top up.

You may get a 30 lakh Rs top up for your dream 2 yo used BMW for a monthly outlay of 25k. Same outlay for a 7 year car loan would get you only 17 lakhs. Wise thing would be to top up with 17 lakhs to get a car. (And that's assuming you are sure you can afford 25k per month over the existing liabilities.)

3. Foresee and factor in you next car purchase/upgrade.
While you may need to change your car in 5, 7 or 10 years, your scheduled top up loan EMI s would stay with you for longer. That will hit your next car buying budget when you need to pay for both the cars. The ability to take next top up loan may or may not work out in your favor in 5-7years

4. Use this facility to create wealth.
Remember the example of 17 Lakh INR car in #2 above? If you go for a 1 year old < 10 k kms car of same model, you may save a good 4 5 lakhs on sticker price. Remember the adage 'depreciation hits hardest in first year' . However try buying that on a loan. A used car loan. You ll find yourself paying same EMI for a lower priced used car. Wise thing to do: Top up with 12 lakhs. Get an almost new 17 lakh car for ~12lakh. Thats a 95%car for 65% money. We here at TBHP are big fans of used cars anyway. You monthly outlay would be 9k instead of 25k in case of a full priced new 17 lakh car. Use your monthly savings wisely.

[rags.singh]

Originally Posted by samee_arian

I had a similar idea and know one of my friends going this route while he bought a pre worshipped car. I think it will make more sense in that case as ROI for pre owned cars is much higher. As far as tax deduction is concerned, I learnt from the bank that a top up loan on a home loan is not considered a home loan but a personal loan linked to home loan, so don't think one can avail any tax deduction on interest paid or payment of principal amount.

Thanks, yes it makes more sense for a pre-owned car. I read somewhere that upto 30000 interest is eligible for tax benefit under top up loans but subject to overall cap of 2 lacs. So I think the tax benefit is non-existent.

Originally Posted by aargee

I don't know your intention for loan; if it's to buy the next gadget/new shiny toys, I will say none!! Defer your purchase (unless life threatening), save the EMI through Bank/PO RD & buy with cash.

This is debatable. Right amount of leverage helps you get the most return from your capital. Its a choice between whether you want to use cash and save on the interest, or take a loan and deploy the cash in other assets which generate much higher return than the loan rate. I think 7.5% for 7 years is a good rate.

Originally Posted by andafunda

Bank of Baroda loans are available at 7.3% floating with no prepayment penalty. I just did the process. Took 2 days. Great experience!

I believe 7.5% fixed for 7 years is a better deal than 7.3% floating. Rates are amongst the lowest, and further reduction is unlikely. Most likely the rates will start going up in the near future. Btw, cheapest floating rate loan that I found was from Punjab and Sind Bank for 7.1% thought don't know about the process.

Originally Posted by Entsurgeon

Here are my inputs on the topic. ......

1. Top up amount offers no tax benefit.
.....
2. Evaluate your car buying budget and loan repayment capability carefully.
.....
3. Foresee and factor in you next car purchase/upgrade.
.....
4. Use this facility to create wealth.
....

Interesting perspectives and inputs

I guess based on suggestions from various members, it makes more sense to go down the top-up route if you are buying a pre-owned car. Otherwise getting the cheapest car loan possible is better.

[andafunda]

Originally Posted by rags.singh

I believe 7.5% fixed for 7 years is a better deal than 7.3% floating. Rates are amongst the lowest, and further reduction is unlikely. Most likely the rates will start going up in the near future. Btw, cheapest floating rate loan that I found was from Punjab and Sind Bank for 7.1% thought don't know about the process.

The 7.3% comes with 0 pre-payment penalty. You can pay as many number of times as you want. Given the state of the economy, rates are unlikely to go up anytime over the next 2 years.

What i don't like about private banks is the opacity in dealing - collecting advance EMI, steep penalties on prepayment, shady deals with car dealerships, etc.

PSU banks offer an overall better experience. This is coming from an ICICI wealth management and HDFC infinia customer.

[MCR]

Home loan top-up is better used to create wealth! It does not make economic sense to buy a car with it.
Car being a liability and with huge depreciation its better to buy with cash.
Assuming that a car loan of Rs. 15,00,000/- is availed, the EMI would be close to 23K for a period of 7 years. Assuming a overall ROI of 8%, one will still end up paying close to Rs.20,00,000/-. The value of a 25 Lakh car at the end of 7 years will be hardly 5 lakhs.
Add to this the yearly maintenance and fuel charges + Insurance cost.
The overall loss would be close to 60% of the on-road price. This increases as the cost of the car increases.
If you buy with cash, what is (as an example) Rs.5 Lakh today will be close to Rs.3 lakh in value in next 5 years. So it makes great sense to buy with cash.

[pedrolourenco]

Originally Posted by aargee

I don't know your intention for loan; if it's to buy the next gadget/new shiny toys, I will say none!! Defer your purchase (unless life threatening), save the EMI through Bank/PO RD & buy with cash.

If you have spare cash then by all means buy the car on cash. Otherwise loan is the best option. Remember that if you wait to save, the price of the car also goes up. So better to pay interest an buy.

Originally Posted by andafunda

Bank of Baroda loans are available at 7.3% floating with no prepayment penalty. I just did the process. Took 2 days. Great experience!

There may be no penalty but if yo see the EMI's, the initial EMI's have interest as a major share and principal as a minor share. So by prepaying you have actually overpaid the interest component.

[rags.singh]

Originally Posted by MCR

......
The overall loss would be close to 60% of the on-road price. This increases as the cost of the car increases.
If you buy with cash, what is (as an example) Rs.5 Lakh today will be close to Rs.3 lakh in value in next 5 years. So it makes great sense to buy with cash.

Obviously if someone has the cash, its a no brainer. But your example (while logical) makes the car loan option look very poor even when you look at it in isolation. What you have not considered is the utility value of owning a car. Different people may assign different utility values but my guess is that the utility value should overcome the interest cost that you pay over the tenor of the loan.

Originally Posted by pedrolourenco

......Remember that if you wait to save, the price of the car also goes up. So better to pay interest an buy.

This is so true. I remember when the Crysta was launched in 2016, the OTR price for the GX variant in Bangalore was about 18 lacs. Today its about 24. That's a CAGR of about 7.5%.

[7000plusrpm]

Originally Posted by pedrolourenco

There may be no penalty but if yo see the EMI's, the initial EMI's have interest as a major share and principal as a minor share. So by prepaying you have actually overpaid the interest component.

I was under the impression that the prepayments count towards the principal amount. The emi stays the same, the tenure goes down due to lower interest payment.
Is my understanding incorrect?

[andafunda]

Originally Posted by pedrolourenco

There may be no penalty but if yo see the EMI's, the initial EMI's have interest as a major share and principal as a minor share. So by prepaying you have actually overpaid the interest component.

Prepayments help reduce the principal. Otherwise why would people prepay at all!

Interest is calculated on the balance principal and either (1) EMI is reduced, tenure remains the same; or (2) EMI remains the same, tenure is reduced. #2 is cheaper for the loan taker.

[BLACNWYTE]

Originally Posted by andafunda

Prepayments help reduce the principal. Otherwise why would people prepay at all!

Interest is calculated on the balance principal and either (1) EMI is reduced, tenure remains the same; or (2) EMI remains the same, tenure is reduced. #2 is cheaper for the loan taker.

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.

[andafunda]

Originally Posted by BLACNWYTE

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.

I absolutely agree with your point. Hence I prefer to take 5 year auto loans with prepayment of principal from the first month itself (PSU banks allow this). I use it like a 2 year payment scheme with the flexibility of extending to 5 years in case I can't pay back. Yes, I pay a bit more on interest cost, but it allows me the flexibility to manage my cash flows.