Thursday, 5 April 2012

Home Loan Interest Increase - Impact

gaur razvan
Neighboring Bhalla Uncle invited me to their home. Here is the reason why they invited me:
Couple of years back, Bhalla Uncle's son Monty and his wife brought a 3 BHK flat. Buying this 3 BHK Flat was more of Bhalla Uncle’s wish than Monty’s Need. Monty and his wife Neeta both working for IT Company.Double Income No Kids(DINKS) made buying a flat more affordable.
The cost of 2 BHK was 55 Lakh and Cost of 3 BHK was 70 Lakh. Considering that buying  a flat is once in life time activity, Bhalla Uncle proposed to go for 3BHK. Banks had no problem funding 50 Lakh Loan for Monty and Neeta as each had take home salary of 75 k.
Monty was reluctant to commit himself.A loan of 50 lakh for 10 years seem to be bit huge for Monty. He was more comfortable with 2 BHK as it came with lesser price tag.
There were Two banks that were ready to fund. Bank “A” had 8% floating interest and Bank “B” had 8.5% fixed for 10 years.
Bhalla family opted Bank “A” as the bank offered loan at lesser interest rates.
With this back ground, let us look into the some Facts and Figures.

Bank A
Bank B
Loan Amount
5000000
5000000
Interest
8%
8.50%
Loan Type
Floating
Fixed
Tenure
10 Years
10 Years
EMI
60,600
61,900
Interest Paid
22,79,600
24,39,100
Total Amount Paid
72,79,600
74,39,100

Looking at the chart, it is pretty clear that going with Bank "A" was sensible decision as the interest paid was relatively lesser. Flat that was under construction for 2 years is ready for possession now. when “All IS SO WELL”, what could be the problem then? Let’s read further...
Here You Go.
The bank in last two years increased the interest rate several times. Current interest rate is 11%. Due to this change, the EMI changed from 60,600 to 68,800. That is almost 8000 Rs increase in EMI… 
Here is the comparison chart for the BANK “A” @ 8% and @11%

Bank A
Bank A
Loan Amount
5000000
500000 
Interest
8%
11%
Loan Type
Floating
Floating
Tenure
10 Years
10 Years
EMI
60,600
68,875
Interest Paid
22,79,600
32,65,000
Total Amount Paid
72,79,600
82,65,000

Due to change in interest from 8% to 11% Bhalla Family will have to shell out 10 Lakh extra in the form of interest to Bank.
Hey… I forgot to tell you a good news… Monty is soon  going to be proud father. Bhalla uncle is going to be Nana…
I thought this good news might mitigate the bitterness of having to pay 10 lakh extra interest. Before this thought could sink in, I was told Neeta has opted to take break for 2 to 3 years.
Remember Neeta earned a take home salary 75 K Per Month. This means here after, its only Monty’s salary that would be the source for EMI and House hold expenses.
Monty draws a take home salar of 75 K. After paying the EMI of 69K, Monty would be left with only 6 K in hand. Monthly expense for Bhalla family is 50 K.  How will they source this short fall of 45 K?
Where did the Bhalla family Go wrong? Is there something they could have done better?
Key points to that Bhalla family need to think over:
·         2 BHK instead of 3 BHK?
·         Going with BANK “B” Instead of Bank “A”
·         Was renting a better Option? Click Here to read why Renting is better option?
Note: This is cooked up story. The article intends to show the impact of change in interest rate. Numeric values displayed in chart are approximate values.
What would be your suggestion to Bhalla Family?

3 comments:

Anonymous said...

two mistakes in your assumptions
1. You assumed that Monty did not get any hike in last two yrs. You can also consider an overseas assignment for monty and see how the calculation changes drastically.

2. You have considered the -ve effect of floating rate interest rate over fixed rate. What if IR goes to down in next few yrs. So u never know.

And renting? What about the hassels if your land lord ask you to vacate the room when u r expecting a good news in a few months time... So, u knw, it would always have pros and cons....

but yes, staying withing limit is very imp... afterall, a well decorated & furnished 2BHK looks far better then an empty 3BHK.. so it is always better to keep the calculation in mind when deciding for the size of the apt.

WealthUCreate said...

Yes Sir, i admit, i did not consider hikes in last two years. Even if factor the Hike, Bhalla Family would still be short by some money. In two years one may not get an increase of 45K per month.

The message article intends to convey - Do your calculations. Be practical. Evaluate various options before commiting.

HDFC Home Loans said...

This program tells about the home loan that the Bhatia family has taken loan

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