[Meer]

My advice (mostly suited to folks in jobs) - having cash in hand is a tricky situation because you / your spouse will be tempted to spend it, i.e. your wish lists will increase. I would advice pay off the loan and be tension free. Though it may sound like a middle-class mentality, the freedom from the burden cannot be explained in words.

But for people in business, they would prefer to roll the money and make more on that.

My person experience - I had 2 houses and loans on both for 4-5 years. Finally I sold one last year to pay off both the loans and I can feel the difference in my general attitude to life. You become more carefree and ready to take more risks to further your career. Wife is happy too and you can then focus on your balance sheets better.

@ Nitin: even I had the same funda in mind - "And in the worst case, I can always sell the second home, can't I?", but it was not simple. When the market was growing, I was thinking, let me wait to maximise the returns. When the market started falling, you already had the earlier benchmark and then difficult for you to agree to a lower price. And general funda, when you need it you will not find the buyers as well. Also, the indian housing market is highly volatile. A minor change in tax rules / bank interest rates may alter the pricing of your property. I observed this for 2-3 years and finally sold my house for 30% less than what I was getting at the peak.

[vnabhi]

Fantastic thread. Wonder how I missed it this long!

I am in favour of pre-paying one's loan to the extent possible, despite what financial gurus might profess.The feeling of relief in the mind that comes from a reduced burden is simply mind-blowing.

I too was wavering between my gut feelings and those expressed by financial planners. But it was only this week that I took a decision to part pay as much as I could afford. What prompted me was an email from ICICI Bank, my lender, stating that the interest rate was now 13.5 %. I had taken the loan 6 years back at a floating rate of 7%.

On account of the regular increase in interest rates over the past 3 years, I had to increase my EMI from 28 K per month to 38 K so that the tenure does not go beyond my retirement. But when last week's email posed the same threat of EMI's stretching beyond retirement, I thought I've had enough of this and paid back 30% of the loan in one installment.

I also paid them around 0.5% of the outstanding loan to convert to a lower rate of interest (it will henceforth be 10% floating). I am not sure if others are aware of this, but this seems to be a better idea than to change lenders. This attractive rate of 0.5% is a recent introduction, and it was earlier around 1.75%.

[devrajman]

Here is a very good home loan interest calculator with prepayment details.

http://www.bankbazaar.com/finance-to...alculator.html

sample calculation

[blackstallion76]

Originally Posted by vnabhi

Fantastic thread. Wonder how I missed it this long!

I am in favour of pre-paying one's loan to the extent possible, despite what financial gurus might profess.The feeling of relief in the mind that comes from a reduced burden is simply mind-blowing.

I too was wavering between my gut feelings and those expressed by financial planners. But it was only this week that I took a decision to part pay as much as I could afford. What prompted me was an email from ICICI Bank, my lender, stating that the interest rate was now 13.5 %. I had taken the loan 6 years back at a floating rate of 7%.

On account of the regular increase in interest rates over the past 3 years, I had to increase my EMI from 28 K per month to 38 K so that the tenure does not go beyond my retirement. But when last week's email posed the same threat of EMI's stretching beyond retirement, I thought I've had enough of this and paid back 30% of the loan in one installment.

I also paid them around 0.5% of the outstanding loan to convert to a lower rate of interest (it will henceforth be 10% floating). I am not sure if others are aware of this, but this seems to be a better idea than to change lenders. This attractive rate of 0.5% is a recent introduction, and it was earlier around 1.75%.

I was thinking of similar lines. But, yet to make a decision to pre-pay or go for Loan Transfer to other Banks(LIC OR SBI). ICICI has just taken us for good ride. I had taken for 7% 5.5 yrs back and now 13.5%. My tenure has gone up to 400 months. Transering loan would incur around 50K expenses in my case. Any suggestions?

[mmxylorider]

If you have spare money to do a part payment, you should look at investing elsewhere at comparable rate of interest and work the spread + home loan tax benefits to your advantage.

Of course, if you do decide to plonk spare money on another real estate option, as far as possible keep the second one debt free.

[shankar.balan]

suggestions:

is the interest amount that you pay towards the loan higher than the amount you save on income tax on account of interest paid towards home loan?

if so pre pay and reduce the burden.
if not, dont.

is the property self occupied or rented?
if self occupied is the emi you are paying, higher than the market rent for the property?
if higher please pre pay. if not, dont.
if rented are you getting enough rent to cover the emi?
if not, please pre pay. if yes, dont.

[vivekiny2k]

Originally Posted by devrajman

Here is a very good home loan interest calculator with prepayment details.

Loan EMI calculator | Calculate Loan EMI from Interest Rate - BankBazaar

sample calculation

Without going into time value of money and opportunity cost, just consider this scenario. Could you invest that 20,000 per month somewhere else and earn better than 11% that you are paying on loan?

The only correct part in the calculation is reduction of the loan tenure by 7 years and 9 months. The money saving is not because the money paid later has to be discounted by the interest rate to current day value.

The question of prepayment (or refinancing) really arises when the market rate changes drastically while your mortgage is at fixed rate. I have a 30 year mortgage at fixed rate. If market rate rises, I will be a happy man, I would rather invest my money elsewhere. If it drops, I will rush to the bank to refinance my mortgage at a lower rate, OR just pay it off earlier if I have any money. The other important factor is prepayment penalty, I hear it's very significant in India. My mortgage has none.


That's the interesting difference between an accountant's and an economist's view. Depends on who you are talking to.

When sensex rises, accountant says your stock value has increased, but the economist says it's not, because the opportunity cost has increased as well. In other words, you could sell it at a higher price, but what are you going to do with the money? all other stock are inflated as well, so is the cost of living (ideally). I have faced this dilemma myself when I was investing in markets.

An economist's view on retirement/pension plan is different from an accountant as well but yes, they all have a retirement plan.

EDIT: Another factor in prepayment decision is liquidity, and taxes. e.g., I could pay off a large portion of my mortgage but I won't because I don't have a permanent status in this country. If I ever had to leave, I would rather have liquid cash with me. Plus, I get a good tax break from the interest payments.

[vnabhi]

Originally Posted by blackstallion76

I was thinking of similar lines. But, yet to make a decision to pre-pay or go for Loan Transfer to other Banks(LIC OR SBI). ICICI has just taken us for good ride. I had taken for 7% 5.5 yrs back and now 13.5%. My tenure has gone up to 400 months. Transering loan would incur around 50K expenses in my case. Any suggestions?

Looks like you and I are in the same boat. Why don't you approach ICICI and ask for what was offered to me? My interest rate got dropped to 4.5% below PLR after I paid them 0.5% of the outstanding amount. Earlier to that, i was paying interest at the rate of 1.25% below PLR. The PLR is currently 14.5 % (it was 8.25% when I took the loan in May, 2005, and hence I was charged 7%, which was 1.25% below the PLR)

One needs to pay 2.2% foreclosure charges if one changes to another bank, so 0.5% is a far better deal.

[vivekiny2k]

Originally Posted by shankar.balan

if rented are you getting enough rent to cover the emi?
if not, please pre pay. if yes, dont.

shankar, just taking the last statement because it's easier to dissect

The prepayment is not going to change the fact that you would still be getting a lower rent that the amount you pay in effect to the bank. You are in loss, no matter whether you prepay or not. And that happened because of change in market conditions between the purchase of the property and today. It should not be a factor in making the decision to prepay.

[shankar.balan]

point understood from this perspective because even if one prepays one doesnt bring down the emi outflow - only the tenure of loan changes.
But overall, one is bringing the liability down so in my opinion it may be better to pre pay.
when you calculate the amount of money paid towards interest in a normal 20 year home loan, it is frightening! Hence generally it is better to prepay the loan as early as possible.

Originally Posted by vivekiny2k

shankar, just taking the last statement because it's easier to dissect

The prepayment is not going to change the fact that you would still be getting a lower rent that the amount you pay in effect to the bank. You are in loss, no matter whether you prepay or not. And that happened because of change in market conditions between the purchase of the property and today. It should not be a factor in making the decision to prepay.

[amohit]

Originally Posted by vnabhi

Fantastic thread. Wonder how I missed it this long!

I too was wavering between my gut feelings and those expressed by financial planners. But it was only this week that I took a decision to part pay as much as I could afford. What prompted me was an email from ICICI Bank, my lender, stating that the interest rate was now 13.5 %. I had taken the loan 6 years back at a floating rate of 7%.

I also paid them around 0.5% of the outstanding loan to convert to a lower rate of interest (it will henceforth be 10% floating). I am not sure if others are aware of this, but this seems to be a better idea than to change lenders. This attractive rate of 0.5% is a recent introduction, and it was earlier around 1.75%.

Originally Posted by blackstallion76

I was thinking of similar lines. But, yet to make a decision to pre-pay or go for Loan Transfer to other Banks(LIC OR SBI). ICICI has just taken us for good ride. I had taken for 7% 5.5 yrs back and now 13.5%. My tenure has gone up to 400 months. Transering loan would incur around 50K expenses in my case. Any suggestions?

Ditto same story. I took the loan from ICICI at 7.5% 6 yrs ago. Until last week it was at 12.75%.Now i have paid them .5% to switch to lower rate. Another thing I did was to switch over to base point index from there PLR based calculation. I hope this will help me in some way. But one good thing that I did was to increase my EMI from time to time. currently I am paying 6k more than what i would have originally and my tenure stands at 83months(down from 240 months).

Btw, I am strongly in favour of closing one loan as soon as possible, and investing in a second property. You cant stay in apartments for 30-40 years, is what i feel.

Regards,

[Jaguar]

I took a home loan last year. The interest being 8.5% till Mar 2011, 9% till Mar 2012 and floating then onwards.
Now I got some money with which I can pre-pay 10% of the loan amount. But with the FD rates > 9% these days, I am confused as to whether I should invest the money in FD or pre-pay? I can always break the FD and pre-pay if the loan rate go above the FD rate after Mar 2012. What say?

[bblost]

I recently did a part pre-payment of my home loan.
The most confusing aspect was calculating what would be reduction in tenure.

Finally figured out how it works. I hope I am correct. If I am wrong, please do correct me.

Goto any emi calculating website:
http://emicalculator.net/



Now at the end of year 1, find out how much Principal has been paid.
In this particular example it is approximately 32,000.

We will prepay 2 lakh rupees.

So now your new principal outstanding is
2,50,0000 - 32,000 - 2,00,000
or 22,68,000

Now remember the EMI was 24,959.
The calculator will show an EMI of 22,643 for the now reduced Principal.
Slide the term ruler till you get close to the old EMI.



As you can see, the tenure has reduced to 180 months.

You had pending 228 EMI's at end of year 1.
Now after a prepayment of 2lakhs you have 180 EMI's left.
A saving of almost 48 EMI's or 4 Years.

[pganapathy]

@bblost - sounds right. My view has always been prepay as much of the loan as possible. Interest is where the bank makes money from the loan. The less of that to pay, the better off you are.

Even if you do get a better rate of return from another investment you do need to subtract that from the interest you pay. I feel it is better to pay off the loan as soon as possible and then you can invest that money freely without having to wonder, did my investment make more than my interest mortgage payment

[mobike008]

In my specific case of home loan, prepayment is detrimental to my tax saving rebates as I have already completed 6.5 years out of 20 years tenure and my home loan interest is 7.5% fixed with ICICI Bank

Besides the principal outstanding is just around 9 lakhs and can be easily cleared in 1-2 installments but, it doesnt make sense as iam enjoying a fixed low rate of interest.