DNA has a good article on how interest payments can exceed capital by a factor of three, thanks to the compounding effect of interest. For those who understand the details, this is a very good reason why high loans don't make sense any more. For those who are caught in this nightmare, not even Bernake or the 'Singh is Kingg' can save them. The effects of leverage and compounding work is reverse the same way as they on the way up.
Borrow Rs25 lakh home loan, repay Rs1 crore
MUMBAI: If the current interest rates stay, you might end up shelling out more than Rs1 crore to pay off a Rs25 lakh home loan. How? Read on.
Six months is a long time, especially if you happened to take a home loan back then.
Banks were charging a floating interest rate of 11% on their home loans. The equated monthly instalment (EMI) on a 20-year loan (or 240 months) of Rs25 lakh would have worked out to Rs25,805 a month.
Around one-month back, banks raised the interest rate on floating rate home loans to 11.5% and have now raised it by another 0.75% to 12.25%.
Last time, hike in interest rates were not accompanied by an increase in EMI. Banks did the smarter thing and increased the tenure of the loan. The remaining tenure of the loan went up from 240 to 269 months.
If banks were to follow the same strategy now and increase the tenure of the loan, instead of increasing the EMI, the remaining tenure of the loan would go up to 394 months. Add to this the six months of EMI you have already paid, and you are looking at a total tenure of 400 months. If you keep paying an EMI of Rs25,805 for a period of 400 months, you would have paid Rs1.03 crore (Rs25,805 x 400 months) by the end of it.
However, the bigger question is will banks allow tenures to shoot up to 400 months?
How it will hurt you
Principal Rs 25 lakh
Initial rate 11%
Tenure 240 months
Initial EMI Rs 25,804
Principal repaid Rs 14,707
in first 5 months
Principal left Rs 24.85 lakh
Rate after 5 months 11.5%
Remaining tenure if 269 months
EMI remains same
Increase in tenure 35 months
at the same EMI
Principal repaid in Rs 4,027
the 6th month
Principal repaid in Rs 1,8734
first six months
Principal left Rs 24.81 lakh
Rate after 6 months 12.25%
Remaining tenure if 393.5 months
EMI remains same
Increase in tenure 159 months
Extra money paid to Rs41 lakh
service the loan (Rs 25,804 x 159)
Total EMI to Rs1.01
Borrow Rs25 lakh home loan, repay Rs1 crore
MUMBAI: If the current interest rates stay, you might end up shelling out more than Rs1 crore to pay off a Rs25 lakh home loan. How? Read on.
Six months is a long time, especially if you happened to take a home loan back then.
Banks were charging a floating interest rate of 11% on their home loans. The equated monthly instalment (EMI) on a 20-year loan (or 240 months) of Rs25 lakh would have worked out to Rs25,805 a month.
Around one-month back, banks raised the interest rate on floating rate home loans to 11.5% and have now raised it by another 0.75% to 12.25%.
Last time, hike in interest rates were not accompanied by an increase in EMI. Banks did the smarter thing and increased the tenure of the loan. The remaining tenure of the loan went up from 240 to 269 months.
If banks were to follow the same strategy now and increase the tenure of the loan, instead of increasing the EMI, the remaining tenure of the loan would go up to 394 months. Add to this the six months of EMI you have already paid, and you are looking at a total tenure of 400 months. If you keep paying an EMI of Rs25,805 for a period of 400 months, you would have paid Rs1.03 crore (Rs25,805 x 400 months) by the end of it.
However, the bigger question is will banks allow tenures to shoot up to 400 months?
How it will hurt you
Principal Rs 25 lakh
Initial rate 11%
Tenure 240 months
Initial EMI Rs 25,804
Principal repaid Rs 14,707
in first 5 months
Principal left Rs 24.85 lakh
Rate after 5 months 11.5%
Remaining tenure if 269 months
EMI remains same
Increase in tenure 35 months
at the same EMI
Principal repaid in Rs 4,027
the 6th month
Principal repaid in Rs 1,8734
first six months
Principal left Rs 24.81 lakh
Rate after 6 months 12.25%
Remaining tenure if 393.5 months
EMI remains same
Increase in tenure 159 months
Extra money paid to Rs41 lakh
service the loan (Rs 25,804 x 159)
Total EMI to Rs1.01
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