I had an interesting discussion with my colleague regarding the house loan.. He had purchased recently a new house at his home town. I am very happy for him, just thought I will go through the scenario in my own terms.
He has taken a loan of 15 Lakh and total cost of the house was 20 Lakh. It is a double bed room house with two floors. I was curious to know the financial details of the plan but he was not that willing hence I cut down short. All that I learnt from the discussion was, the interest rate is 10.75%, tenure of the loan is 20 years and EMI is Rs.13,907. Just for calculation purpose I assume it to be Rs. 14,000. He also told me that he had taken the loan on floating interest that means it can vary according to the market and the fixed rate of interest at the moment is 13.50%. Another interesting thing that he said was he will get a tax rebate and also he is getting around 7k as rent from the property.
Now, he has to pay Rs.14K for next 20 years i.e. 20 *12 = 240 months. His loan amount is 15 Lakh but he will be going to pay, 14k * 240 = 33,60,000. That is more than the double amount.
I just pondered over and thought what is best way to handle this situation, rather if I was in his shoes what would have I done??
First thing, I would save up the rent and put the same amount in recurring deposit since I will get more interest than the savings account. I will at least deposit 6.5K in the savings.
Next thing I would plan is I will make a fool proof plan as to how to pre-close the loan without paying the EMI for next 20 years.
Consider the following situation,
For 1 year the amount paid is 14K * 12 = 1,68,000
For 5 years 14K * 60 = 8,40,000
For 9 years 14K * 108 = 15,12,000
For 10 years 14K * 120 = 16,80,000
From calculations it is clear that we are actually paying 15 Lakh loan amount in just 9 years. So if we don’t pay up after 10 years, financial institutions is not going to lose anything.
How to pre-close the loan: A not so detail plan
Consider that I save up at least 60K per year or 5K per month and also the rent amount 6.5K per month and that adds up to 78K. If the recurring deposit interest is 5% then the amount added is 82K. So total amount saved is 60K + 82 K = 1.42 Lakh.
In this situation if I can manage to save around 1 Lakh due to various other reasons which might come up, In five years I will save up 5 Lakh. If I make a partial payment of 5 Lakh to the house loan then the tenure will decrease at least by 3 – 4 years (Not sure of how many months).
The main aim is to pre-close the loan amount without actually paying for 20 years :).. This makes sense but it needs discipline to save up 1 Lakh in this fancy world, whatever is there in the world need not be at home :).. It is better to be frugal at times and save up rather than getting indulged in the worldly pleasures.
About Tax rebate, I don’t understand why does government gives rebate only if a person has loan, why does not it give rebate if we save up the money??? Government wants people to spend money and suffer from loans, it never expects the citizens to save up and enjoy the life. It tries to tax every other way and make sure that people suffer. Bad government, but citizens have to be smart enough to beat the government. :).. Try to be smart with your calculations and make sure you don’t have to be in trouble to get a tax rebate.
Engineer's Finance 