Pages

Monday, 26 September 2011

How to Get a Home Loan, Free of Cost?



Today, it’s hard to find anyone without a home loan. Most individuals, who are less than 30 years old, create liability before they think of savings.  Most of us who have taken home loan and paying EMI, month after month are always worried about the interest movement. As the loan tenure increases the repayment will jump. For instance if you take 20 years loan, you repay 160% more than your loan at the rate of 11.75%.
 
For example, if you take Rs 25 lakhs of home loan at the rate of 10.5% (Prevailing Rate), then the EMI would be 24,959, and you end up paying Rs. 59,90,279. It means that your total interest outgo is Rs 34.9 lakhs, which is 140% more!
Housing Loan EMI Calculator


Loan Amount 
2500000


Loan Term
20


Payments Per Year
12


Rate of Interest
10.50%

2.396112
Monthly Installment 
24,959
240
5990279

In other words, only after paying nearly Rs.60 lakhs over a 20 year period, the house will be yours.
Hope you all are clear up to this. Now I am going to offer a solution wherein you will get all your money back at the end of the tenure, seems to be interesting!
Two Important Points you have to take care before taking a home loan
  1. Always go for a maximum loan you are eligible for with maximum tenure, even if you have money or some relatives are contributing something for your home loan.
  2. Don’t prepay whenever you get some windfall income or bonus money.
Reaction of people to Home Loan during the tenure of their period
Most of us are not allowing the home loan to continue till the tenure. We try to close as early as possible and often feel that we are paying too much towards interest and also want to be relieved from the home loan burden. The different types of reactions are as follows.
1.      We took lesser years instead of eligible 20 years, feel that they pay less interest and close the loan quickly.
2.      We go for eligible 20 years, but planning to prepay and close as early as possible may be 3 or 4 full lump sum. Often completes in less than 7 years.
3.      We don’t have huge lump sum, yet we close the loan with whatever we got and it will be between 12 and 15 years.

Home Loan is a Boon or Bane?
The beauty of the home loan is; it creates some discipline and commitment which we normally do not exhibit on our own which is really good for the individual as well as the country.
  1. To me it is BOON because it creates corpus for your retirement kitty. The home loan interest rates are normally around 10% in the last 10 years. Even if we assume 11% interest rate, it is only diminishing interest. For 30 lakhs of home loan for 20 years the EMI would be Rs. 30,966 only. Effectively one is paying 1.47 times more which means for 30 lakhs he ends up paying around Rs. 74.31 Lakhs.
Housing Loan EMI Calculator


Solution 1 - Compound Interest
Loan Amount 
30,00,000


SIP Amount
6,000
Per Month
Loan Term
20


Tenor
20
Years
Payments Per Year
12


Return
15.00%
p.a
Rate of Interest
11.00%
Multiplier
2.48
Fund Value
90,95,730

EMI
30,966
240
 74,31,756
Investment
14,40,000





Multiplier
6.3


Scenario 1
Person who takes 20 years housing loan have to initiate another 20% of EMI value towards SIP investment. For example in the above case, 20% would be Rs.6000 and if the returns are assumed at the rate of 15% CAGR (This number is arrived based on any consecutive block of 10 years, the well-diversified equity funds worst returns are always 15%) in the next 20 years, the value would be Rs. 90.95 Lakhs, whereas the individual would have paid home loan EMI totally Rs. 72,31,840 and SIP investment Rs. 14,40,000. If you add together the value will become Rs. 88,71,840 only. Which means if the individual decided to pay another 20% the house will become free the additional 20% will fetch 100% of your money back.
Scenario 2
If an individual takes 15 years housing loan it is better to switch to 20 years, the additional amount Rs. 3,132 (34,098-30,966=3,132) can be systematically invested for the next 15 years in a well-diversified equity mutual fund which will fetch Rs. 21,19,935.
However the individual needs to pay an EMI of Rs 30,966 for the extended 5 years. This EMI requirement can be funded through his SIP investment, he can start withdrawing Rs. 30,966 for the next 5 years from the mutual fund and pay-off the EMI for the extended 5 year period. Even after paying off the loan there will be a residue investment of Rs. 17,24,289  left in his investment portfolio. By simply changing from 15 years to 20 years one can profit Rs. 17.25 Lakhs by using interest rate arbitrage.

Housing Loan EMI Calculator


Solution 1 - Compound Interest
Loan Amount 
30,00,000


SIP Amount
3,132
Per Month
Loan Term
15


Tenor
15
Years
Payments Per Year
12


Return
15.00%
p.a
Rate of Interest
11.00%
Multiplier
2.73
Fund Value
21,19,935

Monthly Installment 
34,098
240
 81,83,498
Investment
5,63,760





Multiplier
3.8


Scenario 3
If an individual takes 10 year housing loan it is better to switch to 20 years (provided their age permits). By extending the period he would save Rs 10,359 on EMI. This saving of Rs. 10,359 (34,098-30,966=3,132) can be systematically invested for the next 10 years in a well-diversified equity mutual fund will grow into a corpus of Rs 28,86,611 @ CAGR of 15%.
However the individual needs to pay an EMI of Rs 30,966 for the extended 10 years. This EMI requirement can be funded through his SIP investment; he can start withdrawing Rs. 30,966 for the next 10 years from the mutual fund and pay-off the EMI for the extended 10 year period. Even after paying off the loan there will be a residue investment of Rs. 12,43,080  left in his investment portfolio. By simply changing from 10 years to 20 years one can profit Rs. 12.43 Lakhs by using interest rate arbitrage.
Housing Loan EMI Calculator


Solution 1 - Compound Interest
Loan Amount 
30,00,000


SIP Amount
10,359
Per Month
Loan Term
10


Tenor
10
Years
Payments Per Year
12


Return
15.00%
p.a
Rate of Interest
11.00%
Multiplier
3.31
Fund Value
28,86,611

Monthly Installment 
41,325
240
 99,18,001
Investment
12,43,080





Multiplier
2.3


The Solution is:
1.      Whatever you pay as EMI for the next 20 years will be given to you at the end of the 20th year, most probably with bank interest. Virtually free of cost.
2.      With no social security, those who joined the government services after 2004 and without saying private organizations, are not entitled for retirement benefits like pension in their golden years. The money which we paid as EMI, if it comes back at the end of the 20yth year, one can use that corpus as a pension fund which in the above case will be Rs 50,000 per month comfortably. So your home loan what majority of us considered as a burden or liability indirectly creates your retirement corpus!!!
Is it Interesting?
Do you want to know how it works?
Provide me your home loan details and I will make your house free of cost at the end of the tenure. Since each individual home loan is different, we can customize based on your needs.


3 comments:

  1. There is a serious issue in the way of trying to achieve the fortune here. This concept is pushing you to become liability (which is so dangerous) to create asset.
    Source for asset creation should always come from your saving or surplus money.

    This article also takes about investing starting SIP in diversified equity fund, which is so risky (not everyone will be willing to take stock market risk).
    If there is somebody who can take that much risk then they will have billion(s) 20 years.

    For example if you invest 36,000 per month (which is your EMI) for 20 years (which is your home loan tenure) and your investment grow by 15% per annum then at the end of 20th year you will have 4,24,11,643.20.
    The same, if it grows 20% per year, then you will have 8,06,49,215.84. If it grows 50% (You need to take little bit of high risk) then you will have 3,59,01,97,268.49. (I can share if you want the calculation)

    If we consider 20% is realistic, now imagine will your 300K house (for Rs 36,000 EMI/month) worth 8C at the end of 20 years?

    Of course, you will be enjoying own house if you have house loan with pressure of paying interest.

    ReplyDelete
  2. Is it better to prepay home loan or invest it somewhere? Here are some pointers that will help you take a suitable decision on your home loan repayments.

    ReplyDelete
  3. Thank you for sharing such great information.
    It is informative, can you help me in finding out more detail on
    is it better to prepay home loan.

    ReplyDelete