Wednesday, September 03, 2008

Loan amortization schedule

I walk into my home today to find a mail from my Banker - there is an increase of 150 Basis Points in the Home Loan interest rate - meaning, my house loan has increased by 1.5% - What stumped my the most is this - My House loan tenure is increased to 425 months from 240 months, keeping the EMI (Equated Monthly Installment / Amortization Money) constant.

It took about 2-3 minutes to understand that a 1.5% increase in house loan can actually almost double my repayment period - and needless to say, you would almost pay 80% than what you actually would have paid at the end of the agreed period - in my case 24 months.

There was no mathematical error - and the easier way to decrease my 80% additional payout is to increase my EMI by just about 8% a month.

At first, I took the easy way out asking uncle "Google" for the formula for amortization / calculate payout months with EMI constant, and for a surprise - I did not get any simple answers - There were some good Excel Templates on Microsoft site - but I wanted something as simple, that can explain to my dad, who thinks either the bank is a robber or the son is negligent based on his mood.

So to help other souls like me, I built a simple Excel Sheet to calculate the EMI show 2 variations.

1. The Interest Rate increases - (that's what we hear every day) - How much does my EMI increase, if I keep the repayment period constant. I have shown the analysis for about 250 basis points of positive variation ~ meaning 2.5% increase - Why 2.5% increase - If the increase is more than this - I think its cheaper to take a loan from the open market and close the loan :)

2. The EMI is kept constant - The repayment period is increased - my scenario at the start of the blog - and this does not look good at all - a 0.5% increase increase by payout by 80% !!!! - I have shown a variance of 250 basis points here too - you would notice, that if you enter large loan amounts and higher interest rates - the "No of Months" column throws an error - it's actually not an error - this only means that the number of months to repay runs beyond your expected life time and I guess no bank likes that :P - meaning you are forced to increase your EMI - ofcourse, the bank will increase it to the base minimum to match the last payment to your last salary - ahhahahhahaha

I hope the template is useful - you can download it here:

I can answer few questions - pls do not ask me on how to solve your financial problems - you need to pay me for that :)



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Moses John Wesley said...

@ Anonymous -
Thanks for the compliment - I dont keep posting much of late - keep visiting my blog once in a while

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