India home loan options - pre-EMI vs ADF
India home loan options - pre-EMI vs ADF
Mantri has launched a scheme where they pay the pre-EMI interest for the first 50 flats in their Chennai OMR project. Looking at their flyer it seems the pre-EMI interest is more than 11lakhs for a 50L loan at 11% for 2 years. This is a total rip-off by the banks.
India home loan options - pre-EMI vs ADF
sftrade;44957Mantri has launched a scheme where they pay the pre-EMI interest for the first 50 flats in their Chennai OMR project. Looking at their flyer it seems the pre-EMI interest is more than 11lakhs for a 50L loan at 11% for 2 years. This is a total rip-off by the banks.[/quote]
Once the bank release the money, your interest clock start ticking. I dont think that is unfair. But over and above that they should not charge anything.
Do you know how this was computed ?
India home loan options - pre-EMI vs ADF
Its simple interest on the outstanding slab-wise amount which is paid as the slabs are built. So after the full loan in disbured, the EMI"s start. The pre-emi interest doesnt reduce the principal. This is robbery in broad daylight. In Mantri's case they are paying the pre-EMI so you just pay 5.6L and then pay the EMI's once the full loan has been disbursed which is after 24 months.
India home loan options - pre-EMI vs ADF
sftrade,
This article may shed some light on this issue.
Taking a home loan? Take pre-EMI
http://www.rediff.com/getahead/2006/jul/03loan.htm
When looking for a home, there are two major steps: zeroing in on a home and getting a loan. Let's say you have finalised the first and your new home is likely to get constructed in about two years time.
You have started approaching Home Finance Companies to finance the deal. Most will give you two options: Advanced Disbursement Facility or Pre-EMI.
The question is: Which one to opt for?
To answer that, let's take an example.
Cost of home: Rs 30 lakh (Rs 3 million)
Loan amount: Rs 27 lakh (Rs 2.7 million)
Date of completion: Two years from now
Home loan tenure: 20 years
Interest rate: 8.5% per annum
Equated Monthly Installment: Rs 23,431
For simplicity, we would assume the interest rate does not change. And, if it does, it will affect both the options equally.
Advance Disbursal Facility
The HFC would disburse the entire amount to the builder immediately. Your EMI would also start immediately. You would start paying Rs 23,431 to the HFC for 240 months, starting from the current month.
Pre-EMI
The entire amount is not paid to the builder immediately (as above). The sanctioned amount is disbursed to the builder as and when the stipulated work as per the agreement is completed. For example, the bank may state that when the third floor slab is placed, 25% of the amount will be disbursed. When sixth floor is complete, another 25% will be paid. This is known as partial disbursement.
During this time, before the entire loan is disbursed by the HFC to the builder, you will have to pay pre-EMI to the HFC. This pre-EMI is actually the interest on the amount disbursed (partial disbursements).
In our example, it will be the total amount disbursed over the construction period of two years.
Pre-EMI is the interest on the partial disbursals till the final disbursement is made. Once the final disbursement is made by the HFC to the builder, your EMI starts.
So, for first two years, you would be paying only interest and not repaying any principal; thereafter, you would be paying your EMI for 240 months.
Which one is costlier?
On the face of it, most of you would tend to feel the pre-EMI option is costlier. After all, you are paying interest for two years plus EMI for 240 months.
In the ADF option, you are just paying 240 EMIs.
What's more, if the construction period gets delayed by say six months, you will again have to pay interest for these months in addition to the two years.
No such issues under ADF, where delay in construction won't hit you.
But it's not as simple as it looks. Take a closer look at the figures before you jump to a conclusion.
ADF is good, in fact very good. But not for you! It's good for the builder. The reason is that the sum you were supposed to pay him over a period of two years is paid to him on day one. He uses that money and you pay interest on it.
Months | ADF (Rs) | Pre-EMI (Rs) | Difference (Rs)
1 to 24 | 23,431 | 9,961* | 13,470
25 to 240 | 23,431 | 23,431 | Nil
241 to 264 | Nil | 23,431 | (23,431)
Total | 5,863,440 | 6,092,940 | (229,500)
* See How pre-EMI was calculated to understand how we arrived at this figure.
Under ADF you're paying Rs 13,470 (23,431 - 9,961) extra for each of the first 24 months. However, you will have to pay an extra Rs 23,431 under pre-EMI for each of the last 24 months (month starting from 241 till 264).
Now if the amount of Rs 3,23,280 (13,470 X 24) saved in the beginning is invested for almost 20 years at an average rate of 10%, the amount would almost be Rs 21,75,000.
The amount required for repayment is 23,431 X 24 = Rs 5,62,344.
So, under pre-EMI, you would gain by over Rs 16,00,000 at the end of 20 years. If the construction gets delayed then the gain would be even more.
The builders know it
That is why, off late, they have started offering carrots to the buyers. So if you agree to go for ADF, some builders would offer you a discount in property cost while others would even be ready to reimburse your pre-EMI interest burden. Some might even offer a combination of both!
This article may shed some light on this issue.
Taking a home loan? Take pre-EMI
http://www.rediff.com/getahead/2006/jul/03loan.htm
When looking for a home, there are two major steps: zeroing in on a home and getting a loan. Let's say you have finalised the first and your new home is likely to get constructed in about two years time.
You have started approaching Home Finance Companies to finance the deal. Most will give you two options: Advanced Disbursement Facility or Pre-EMI.
The question is: Which one to opt for?
To answer that, let's take an example.
Cost of home: Rs 30 lakh (Rs 3 million)
Loan amount: Rs 27 lakh (Rs 2.7 million)
Date of completion: Two years from now
Home loan tenure: 20 years
Interest rate: 8.5% per annum
Equated Monthly Installment: Rs 23,431
For simplicity, we would assume the interest rate does not change. And, if it does, it will affect both the options equally.
Advance Disbursal Facility
The HFC would disburse the entire amount to the builder immediately. Your EMI would also start immediately. You would start paying Rs 23,431 to the HFC for 240 months, starting from the current month.
Pre-EMI
The entire amount is not paid to the builder immediately (as above). The sanctioned amount is disbursed to the builder as and when the stipulated work as per the agreement is completed. For example, the bank may state that when the third floor slab is placed, 25% of the amount will be disbursed. When sixth floor is complete, another 25% will be paid. This is known as partial disbursement.
During this time, before the entire loan is disbursed by the HFC to the builder, you will have to pay pre-EMI to the HFC. This pre-EMI is actually the interest on the amount disbursed (partial disbursements).
In our example, it will be the total amount disbursed over the construction period of two years.
Pre-EMI is the interest on the partial disbursals till the final disbursement is made. Once the final disbursement is made by the HFC to the builder, your EMI starts.
So, for first two years, you would be paying only interest and not repaying any principal; thereafter, you would be paying your EMI for 240 months.
Which one is costlier?
On the face of it, most of you would tend to feel the pre-EMI option is costlier. After all, you are paying interest for two years plus EMI for 240 months.
In the ADF option, you are just paying 240 EMIs.
What's more, if the construction period gets delayed by say six months, you will again have to pay interest for these months in addition to the two years.
No such issues under ADF, where delay in construction won't hit you.
But it's not as simple as it looks. Take a closer look at the figures before you jump to a conclusion.
ADF is good, in fact very good. But not for you! It's good for the builder. The reason is that the sum you were supposed to pay him over a period of two years is paid to him on day one. He uses that money and you pay interest on it.
Months | ADF (Rs) | Pre-EMI (Rs) | Difference (Rs)
1 to 24 | 23,431 | 9,961* | 13,470
25 to 240 | 23,431 | 23,431 | Nil
241 to 264 | Nil | 23,431 | (23,431)
Total | 5,863,440 | 6,092,940 | (229,500)
* See How pre-EMI was calculated to understand how we arrived at this figure.
Under ADF you're paying Rs 13,470 (23,431 - 9,961) extra for each of the first 24 months. However, you will have to pay an extra Rs 23,431 under pre-EMI for each of the last 24 months (month starting from 241 till 264).
Now if the amount of Rs 3,23,280 (13,470 X 24) saved in the beginning is invested for almost 20 years at an average rate of 10%, the amount would almost be Rs 21,75,000.
The amount required for repayment is 23,431 X 24 = Rs 5,62,344.
So, under pre-EMI, you would gain by over Rs 16,00,000 at the end of 20 years. If the construction gets delayed then the gain would be even more.
The builders know it
That is why, off late, they have started offering carrots to the buyers. So if you agree to go for ADF, some builders would offer you a discount in property cost while others would even be ready to reimburse your pre-EMI interest burden. Some might even offer a combination of both!
India home loan options - pre-EMI vs ADF
The idea is like this.
Say a real estate company has cash flow problems. They are not getting bank loans easily. If a buyer is releasing money in installments, it does not help them. So, they go for ADF. Now buyer pays all the money through the bank home loan. Home loan int rates are lower. Using the buyer name, the RE company pays lower interest. ( This is good marketing ploy and the buyer believs the company is taking "their" payments which is not true. ) Otherwise buyer would have ended up financing the company cash flow. Buyer ended up cursing the bank, while the builder laughs all the way to the bank. ;)
This also help the builder to sell their apartments in a slow market.
Say a real estate company has cash flow problems. They are not getting bank loans easily. If a buyer is releasing money in installments, it does not help them. So, they go for ADF. Now buyer pays all the money through the bank home loan. Home loan int rates are lower. Using the buyer name, the RE company pays lower interest. ( This is good marketing ploy and the buyer believs the company is taking "their" payments which is not true. ) Otherwise buyer would have ended up financing the company cash flow. Buyer ended up cursing the bank, while the builder laughs all the way to the bank. ;)
This also help the builder to sell their apartments in a slow market.
India home loan options - pre-EMI vs ADF
I agree and then Mantri is deceptively marketing the actual sq.ft cost by claiming that the actual sq/ft price has reducedd.
i.e 3440 - 11L/1400 = 26xx.
This is fraud, since real price per sq/ft in the absence of the loan is
3440 + 11L/1400 = 43xx
I'm sure many will fall for this.. Someone needs to report this to the AdCouncil
i.e 3440 - 11L/1400 = 26xx.
This is fraud, since real price per sq/ft in the absence of the loan is
3440 + 11L/1400 = 43xx
I'm sure many will fall for this.. Someone needs to report this to the AdCouncil
India home loan options - pre-EMI vs ADF
RRK Thanks for taking time and explaining ADF and Pre-EMI. Helps many of us to understand things clearly.
One question from layman.
From your posts I do understand that it is always better to go for Pre-EMI.
But in the event of the builder paying the interests in case of ADF, (I dont for how long the builder pays the interest. I assume he pays the interest till the EMI kicks in i.e the building is completed and handed over to you. Correct me if I am wrong), shouldn't the ADF be better.
Sure the builder gets the entire amount in advance, but from a buyer prespective how does this work out?
One question from layman.
From your posts I do understand that it is always better to go for Pre-EMI.
But in the event of the builder paying the interests in case of ADF, (I dont for how long the builder pays the interest. I assume he pays the interest till the EMI kicks in i.e the building is completed and handed over to you. Correct me if I am wrong), shouldn't the ADF be better.
Sure the builder gets the entire amount in advance, but from a buyer prespective how does this work out?
India home loan options - pre-EMI vs ADF
Ravi;45186RRK Thanks for taking time and explaining ADF and Pre-EMI. Helps many of us to understand things clearly.
One question from layman.
From your posts I do understand that it is always better to go for Pre-EMI.
But in the event of the builder paying the interests in case of ADF, (I dont for how long the builder pays the interest. I assume he pays the interest till the EMI kicks in i.e the building is completed and handed over to you. Correct me if I am wrong), shouldn't the ADF be better.
Sure the builder gets the entire amount in advance, but from a buyer prespective how does this work out?[/quote]
Ravi,
ADF is not a preferred option even if builder is paying the interest. ADF is preferred when you have complete "control". Say for example, you get a contractor and assign the building job and expect that to complete in 6-10 months.
When you go with large builders, the time frame has some uncertainities. By dispersing ADF, you are on hook with bank. You owe money to bank, at the same time you have no control over the project completion.
If the builder ends up like Alacrity ( who was once #1 builder in Chennai but finally files for bankruptcy), stretching the project for 10 years, what would you do ? You have to pay EMI and rent and take the builder to court..
It is a nightmare. :emcry:
How much you are ready to pay to avoid a situation like that ? ;)
India home loan options - pre-EMI vs ADF
sftrade,
Did you mention this 11 % interest rate as casual/example or is it the present interest rate(floating) banks are offering ? Recently I was offered 11.5% by CITI bank.
RRK,
With reference to your posts in this thread, recently I went to through similar situation and I finally opt for Pre-EMI by paying interest only till full loan get disbursed. I asked builder to give better upfront discount to disburse full amount at one shot. As they didn't offer the same I preferred for pre - EMI payments.
Murari
Did you mention this 11 % interest rate as casual/example or is it the present interest rate(floating) banks are offering ? Recently I was offered 11.5% by CITI bank.
RRK,
With reference to your posts in this thread, recently I went to through similar situation and I finally opt for Pre-EMI by paying interest only till full loan get disbursed. I asked builder to give better upfront discount to disburse full amount at one shot. As they didn't offer the same I preferred for pre - EMI payments.
Murari
sftrade;45283Mantri has launched a scheme where they pay the pre-EMI interest for the first 50 flats in their Chennai OMR project. Looking at their flyer it seems the pre-EMI interest is more than 11lakhs for a 50L loan at 11% for 2 years. This is a total rip-off by the banks.[/quote]
India home loan options - pre-EMI vs ADF
sftrade;45283Mantri has launched a scheme where they pay the pre-EMI interest .[/quote]
RRK, got your point.
I am trying to understand what does the above statement mean.
So does this mean the builder is going pay all the interest till the apt is delivered to us, if we go for ADF.