I HAVE BEEN TOLD TO SAY…THIS IS A HYPOTHETICAL EXAMPLE –

ANY resemblance of this to the real world should not happen..

Viewer: Sir I have a home loan of Rs. 45 lakhs payable over 20 years at a (floating rate) of 11.75%. A new Aggressive Bank is offering me a New Loan of Rs. 45 lakhs at a rate of 11%. However this will involve paying a 2.1% prepayment charges.

What would you suggest?

Answer given:..You will spend about 90,000 as prepayment, but you will save about 0.75% p.a. for the next 20 years (=22,500 * 20 years) whereas you will pay only Rs. 90k as prepayment charges. So definitely worth it.

Will the readers pick holes in the story please?

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  1. Like The gentle lady before, I paid off my off my 15 years – 11.75% home loan the only difference is that being a NRI I could do it by taking a personal loan in Dubai – 4 years – flat rate of 3.2% … But then the question which still troubles is was it a right decision or could I have invested that money somewhere else, especially given that both the EMI are nearly same

  2. I think the author is referring to the fact that the Present Value of Interest Saved coz of reduced interest rate is lower than the PV of prepayment charges i.e 90k.

    Points regarding insurance n some transfer cost were also correct.

  3. Hi Deepak,

    Your decision looks absolutely right. You reduced your interest from 11.75% to 3.2% (difference of 8.55%) that too for only 4 years. So in terms of total amount to be paid as interest, you have saved a lot lot lot of interest payment. Whereas if you had invested in equities/mutual funds, you could have get returns somewhere around 12-15% (realistically expecting). So there wasen’t much saving here. But this option is not available for everybody 🙂
    So those people better go by Subra Sir’s way of investing surplus in equity and keep paying your home loan EMI.

  4. We save tax by paying home loan. Either way, cash only outflows ! This means, either you pay to government OR a bank. Paying government is a good idea because it serves few purposes[Social cause] such as polio eradication, free primary education etc.,

    Hence, if an individual has money then pre pay the home loan and pay taxes !!! 🙂

    What other readers has to say?

  5. Hi all,
    Wanted to share my home loan story here..
    took a loan of 31.6 L from hdfc… paid pre emi for disbursed amt for one yr.. after the emi started( floating rate interest started from 10.75 then went till 11.65%).. switched to SBI for 30 L with (9.95.. now at 10.15 %)
    I didnt take any home loan insurance with HDFC.. but I did lose the amount i spent to mortgage my home to HDFC (around(15k)..
    Now am paying tha same EMI for this loan with 15 yrs tenure.. whereas the hdfc one was with 20 yrs tenure..The loan transfer costed 6k(processing fees) and 15k for MOD registration..
    The SBI loan was taken with max gain facility.. which is a method to calculate the interest outgo of every month based on the surplus funds parked in the OD acc provided..
    It looked like a gud decision to me.. did i miss anything??

  6. if one intends to keep paying thru the complete 20 year tenure of the loan, inflation must be considered.paying 90k 20 years from now is the equivalent of 20k today assuming an inflation of 8%

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