Mortgage Advice | Module D: Wealth Management

Additional Reading Material on Home Loans & Financial Tools

Author: Suman Biswas (Bank Theory)

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1. Mortgage Advice

Mortgage advice helps borrowers choose the right home loan product based on income, credit score, and future financial goals. Advisors assess repayment capacity, suggest fixed or floating interest rates, and analyze risk appetite.

2. Home Information Packs (HIPs)

HIPs include vital documents like Energy Performance Certificates, property title documents, and local authority searches. They ensure transparency for buyers in property deals.

3. Time Value of Money (TVM)

TVM is a key concept in finance, indicating that a sum of money today is worth more than the same sum in the future due to earning capacity. This is the basis for discounting and compounding calculations.

Formulas:

• Future Value (FV) = PV × (1 + r)ⁿ
• Present Value (PV) = FV / (1 + r)ⁿ

4. Interest and Annuities

An annuity is a series of regular payments made at equal intervals. It can be an ordinary annuity (end of period) or annuity due (beginning of period).

Formula for Present Value of Ordinary Annuity:

PV = PMT × [(1 - (1 + r)-n) / r]

5. Capital Gains

Capital gain is the profit earned from selling a property at a price higher than its purchase cost. Indexed cost of acquisition and improvement are used to compute long-term capital gains in real estate.

6. Loan Calculator and Amortization Schedule

A loan calculator helps estimate monthly EMIs, total interest, and total cost of the loan. Amortization schedules provide a year-by-year breakdown of principal and interest paid.

Medium-Hard Mathematical Examples

1. Example 1: Calculate EMI for a loan of ₹20,00,000 at 8% interest for 20 years.
   Formula: EMI = P × r × (1+r)ⁿ / [(1+r)ⁿ - 1]
   Answer: ₹16,729 approx
2. Example 2: Find the present value of an annuity paying ₹10,000 yearly for 10 years at 7%.
   PV = ₹10,000 × [(1 - (1 + 0.07)^-10) / 0.07] = ₹70,443 approx
3. Example 3: Future value of ₹5,000 invested annually for 5 years at 6%.
   FV = ₹5,000 × [(1 + 0.06)⁵ - 1] / 0.06 = ₹28,186 approx
4. Example 4: Time to double money at 10% interest (compounded annually).
   Rule of 72: 72 / 10 = 7.2 years
5. Example 5: Loan outstanding after 5 years of a 10-year ₹10L loan at 9%, EMI = ₹12,668.
   Use amortization schedule or PV formula for remaining 5 years: PV = ₹12,668 × [(1 - (1 + 0.0075)^-60) / 0.0075] ≈ ₹6.00L
6. Example 6: Indexed cost of property bought at ₹10L in 2005-06 (CII=117) and sold in 2021-22 (CII=317).
   Indexed cost = ₹10,00,000 × (317 / 117) = ₹27,08,547
7. Example 7: Calculate gain if sale price = ₹40L and indexed cost = ₹27.08L.
   Capital Gain = ₹12.92L
8. Example 8: EMI comparison: ₹30L for 15 years at 7.5% vs 8.5%.
   EMI at 7.5% = ₹27,770; at 8.5% = ₹29,542 → Difference = ₹1,772/month
9. Example 9: Net EMI after tax deduction if borrower gets 30% tax benefit on ₹2L interest and ₹1.5L principal.
   Tax Savings = ₹60,000 + ₹45,000 = ₹1.05L; Effective EMI reduced annually by ₹8,750/month approx
10. Example 10: Down payment of ₹5L, loan ₹25L at 7.2% for 20 years. What is total interest?
    Total payments = ₹25L × EMI of ₹19,744 × 240 months = ₹47.38L; Interest = ₹22.38L

MCQs with Answers

1. What does EMI stand for in a home loan context?
   a) Equal Monthly Interest
   b) Equated Monthly Installment ✅
   c) Emergency Monthly Income
   d) Equity Mortgage Installment
2. Which of the following is not part of a Home Information Pack?
   a) Title documents
   b) Energy performance certificate
   c) Borrower's salary slip ✅
   d) Local authority search
3. Time Value of Money indicates:
   a) Money loses value over time
   b) Money gains value over time
   c) A rupee today is worth more than a rupee tomorrow ✅
   d) Future money is equal to present money
4. Which formula gives Present Value of an ordinary annuity?
   a) PV = PMT × r × n
   b) PV = PMT × [(1 - (1 + r)^-n) / r] ✅
   c) PV = PMT / r
   d) PV = FV × (1 + r)ⁿ
5. Capital gains from property are computed based on:
   a) Simple interest
   b) Loan tenure
   c) Indexed cost of acquisition ✅
   d) Amortized principal
6. Which of these is true about amortization schedule?
   a) It shows only interest portion
   b) It increases over time
   c) It breaks down EMI into principal and interest ✅
   d) It’s used for fixed deposits
7. Loan calculators are useful for:
   a) Estimating total tax
   b) Finding exact capital gains
   c) Calculating EMIs and total cost ✅
   d) Stock market projections
8. What is an annuity due?
   a) Payments made at end of period
   b) Payments made at beginning of each period ✅
   c) Lump sum payment
   d) Interest-only payment
9. Rule of 72 is used to calculate:
   a) EMI duration
   b) Doubling period of investment ✅
   c) Capital gain index
   d) Tenure of a mortgage
10. Which rate is most crucial in home loan EMI calculation?
    a) Repo rate
    b) MCLR
    c) Interest rate ✅
    d) Inflation rate