I have been trying to close a home loan recently to buy a new property as the kid grows older and needs more space than we have in the current apartment - nothing new in this story of urban progression. However, when I started getting quotes, I decided to put my MBA and knowledge of Excel to some use and validate if the EMI as per the terms the bank matches what the formula told me.
The formula I used is the PMT function in Excel (but I also referred to this excellent blog post by Ranjit Mathew). The quote I had from my bank, let's call it Big C for now, was 10.75% monthly reducible and end of month payments for a term of 23 years. To convert annual interest rate to monthly, I used this formula -
Monthly Interest Rate = ((1 + Annual Interest Rate) ^ (1/12)) - 1
Based on this, monthly interest rate was 0.85451% and the EMI per lakh came out to about INR 945.
Monthly Interest Rate = ((1 + Annual Interest Rate) ^ (1/12)) - 1
Based on this, monthly interest rate was 0.85451% and the EMI per lakh came out to about INR 945.
When I asked Big C to explain it's calculations, I was shocked to learn that they used this formula -
Monthly Interest Rate = Annual Interest Rate /12
Based on this, the monthly interest rate was 0.8958% and the EMI per lakh came out to INR 979. In addition, on compounding this monthly interest rate, the annual rate came out to be 11.3%.
Incredible - a difference of nearly 4% on EMI!!
Am I the only one or have others seen this issue as well?
I've just received another quote from a bank that I am going to call Big A. Same problem :)
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