Increase in EMI or increase in tenure or part prepayment

With day by day increasing interest rates in India and in some other countries as well, many home loan borrowers are wondering which is the best option for them?
1. Increase in EMI
2. Increase in tenure
3. Part-prepayment to keep the same EMI and tenure.

Let's take an example. The borrower has a home loan of 30 lakhs (30,00,000) for a duration of 20 years. Let's say the rate of interest was 9% and so the EMI was 27,000.

Scneario: Rate of interest increases from 9% to 10%

Option 1: Increase the EMI to 28,980 and keep the same tenure of 20 months
Option 2: Increase the tenure to 26 years, 2 months and keep the same EMI
Option 3: Make a part-prepayment of 2,05,000 and keep the same EMI of 27,000 & the same tenure of 20 years.

Which one is better? Let's look at all the 3 options. Let's look at what would be the total outgo in complete repayment of the loan in all the 3 cases.

Before interest rate increase (rate at 9%): Principal = 30,00,000. Interest = 34,75,000. Total outgo = 64,75,000.
Option 1 (Increase EMI): Principal = 30,00,000. Interest = 39,33,000. Total outgo = 69,33,000.
Option 2 (Increase tenure): Principal = 30,00,000. Interest = 54,67,000. Total outgo = 84,67,000.
Option 3 (Part prepayment): Principal = 30,00,000 (including part prepayment). Interest = 36,76,000. Total outgo = 66,76,000.

As you may notice, the principal amount one repays remains the same, as that is the loan one has taken. The difference is in the interest.....and what a difference!! Another thing to notice is that the total outgo in all the three options is higher than the current situation - this is obviously because the rate has increased from 9% to 10%. So the borrower is worse off than before. But by how much is the question? How much worse off the borrower gets depends on what option the borrower chooses. Let's see.

As is obvious, the best option is to go for partial prepayment to keep the EMI and tenure the same, but again it requires a lumpsum payment which may not be possible due to financial constraints.

The next best option is to pay higher EMI, again subject to whether one is able to afford the increase in EMI.

The last and the worst option for the borrower is increase in the tenure of the loan. No wonder, banks increase the tenure of the loan by default unless you specifically ask them to increase the EMI or opt for part prepayment. The banks will opt for increase in EMI or part-prepayment only if the tenure is getting too long and is not allowed by their policy. The bank's choice is in the bank's best interest and not yours.

So, visit the bank. And ask them for other options. Ask what would be the increased EMI if you want to keep the same tenure? Or how much prepayment you can make to keep the same EMI and same tenure. Even if the bank charges a 2% penalty on partial prepayment, it may be worth it. Give it a thought!! Visit the bank and get to know your options!!

Note: The calculations are rounded off and may be off by a bit (a couple of thousands). But they are accurate enough to make the right point! :-)

Effect of interest rate increase on loan EMI

RBI has increased the repo and reverse repo rates several times in the past one year and the indian banks and NBFCs have been quick in passing on the higher interest rates to their existing loan customers. With recent interest rate increases, one wonders what is the impact on the EMIs (the monthly installments) or the tenures of the loans, specially big ticket loans like home loans.

To take an example: The EMI per lakh (100,000) for a duration of 20 years and interest rate of 10.00% would be 966. If the interest rate goes up by 0.25%, the EMI will go up by 16 to keep the same tenure of 20 years. So, to repay the loan of 1 lakh in 20 years, the EMI increases to 982 at 10.25%. Usually banks will not increase the EMI, but will rather increase the tenure of the loan and keep the same EMI. In that case if the interest rate goes up by 0.25% and the EMI remains the same at 966, the tenure of the loan will increase by 14 months. So, the loan which was originally for 20 years will last now for 21 years and 2 months.

This can have huge implications for home loan borrowers with recent large increase in interest rates. Let's take a typical example of a home loan of 30 lakhs (30,000,000) for a duration of 20 years.

If one had got the loan at 9%, the EMI would have been 27,000. If the rate has now gone upto 10% and the borrower wants to keep the same EMI, the new tenure will be 26 years and 2 months! If the rate instead went upto 10.5%, the new tenure with the same EMI will be 34 years and 3 months!! If the rate went all the way upto 11%, the borrower cannot pay off the loan with an EMI of 27000, he has to increase the EMI. If the borrower wants to keep the same tenure i.e. 20 years, the new EMIs would be 28980 for a rate of 10%, 29960 for a rate of 10.5% and 31000 for a rate of 11%. You get an idea! You can always ask your bank for what would be the increased EMI if you want to keep the same tenure. Or what would be the increased tenure with the same EMI.

Given a choice, should one opt for increase in EMI or increase in tenure of the loan? Usually if one can bear the burden of the increased EMI, that leads to lesser total outgo of money over the duration of the loan compared to when the tenure of the loan is increased. If you can afford it, go for a higher EMI.

Global remittance to India

Just how much do the 27 million global desis, scattered across 190 countries around the world, contribute to the Indian economy? World Bank figures show a dramatic increase of almost 162% in the remittance that India receives from overseas Indians over the last eight years. While India received nearly $21 billion from overseas Indians in 2003, the figure jumped to $55 billion in 2010.

"India received the highest remittance in 2010 compared with any other country in the world," said Dr Alwyn Didar Singh, secretary, ministry of overseas affairs during a discussion on the Indian diaspora organised by the global think tank Gateway House. World Bank data also points to the fact that India receives the highest remittance, followed by China ($51 billion) and Mexico ($22.6 billion), Philippines ($21.3 billion) and France ($15.9 billion) in 2010.

Though there was a slight dip in remittance from 2008 to 2009, it bounced back in 2010 to a level higher than in 2008. Kerala and Punjab are currently among the states which receive the highest remittance from overseas residents

Is tax on early termination fees legal

You had to terminate that cellphone contract for some reason. Sadly, you end up paying the early termination fees. But that's not all. Your final bill may include a tax on the early termination fees! Yes, getting charged tax on early termination fee does look unfair. However, it may not be illegal after all.

Is it legal?
Unfortunately, there is no simple yes or no answer for this. There are several factors at work. Such taxes are usually imposed by the state, so you need to know the state tax laws. One of the things you would want to check is whether your contract lists the early termination fees as a charge/fees or as a penalty. Ideally, one can argue that there should not be any taxes to be paid on penalty, but if it is treated as a charge by your provider, it may be difficult to argue other way. So, look up that contract.

To give an example, T-Mobile contract states "The Early Termination Fee is part of our rates and is not a penalty." You can look up the T-mobile terms and conditions here. In this case it would be hard to argue that taxes should not be applicable.

Does that mean there is no way around?
Well what you need to do is to check the tax law of the state your service is in. It could vary from state to state.