[ecis2016.org] Discussed in detail are the home loan repayment options offered by banks from which borrowers can select, depending on their individual needs
Every home loan borrower has to repay his housing loan over a pre-fixed tenure. However, most borrowers might not be aware of the various options that banks offer with respect to the loan repayment. Even though the simple repayment option exists for every borrower, buyers can pick one of the below-mentioned repayment options, to suit their individual requirements.
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You could use this repayment option, if you are monetarily stressed, after having spent your savings in making the down-payment for the property. If you have invested in an under-construction property, you may also be paying rent and may find the added burden of EMI payments slightly harrowing. This repayment option is typically available to salaried individuals and working professions between the age of 21 and 45 years.
How this mode of payment works
The bank signs an agreement with you, under which it offers you a moratorium period, during which you do not pay any equated monthly installment (EMI). During this period, which might last between 32 and 60 months, you will be liable to pay only the pre-EMI interest. At the culmination of the moratorium period, the EMI payments would start and the monthly payment might be increased during the following years by the bank.
The catch: Even though this arrangement gives you an option to relax for a while, the overall cost of borrowing might be higher in this case. If your income level also does not increase as much as you expected, you may be financially stressed for a long time.
Borrowers who expect their incomes to increase in future, can opt for this type of repayment, in which the EMIs are lower towards the initial years of the repayment cycle. Under this arrangement, also known as a ‘step-up repayment’ facility, banks assume that the borrower’s income has the potential to increase substantially in the years to come. As your income increases, the EMI outgo increases too. Since age plays a crucial factor in this case, lenders would prefer to offer you this facility if you are young, since they expect you to pay off the home loan in the latter part of your working careers. Leading private banks HDFC and ICICI Bank, both offer this facility to their borrowers.
The catch: There is only so much one can predict about the future. In case your income is adversely affected, because of circumstances beyond your control, you will still have to pay the higher EMI as the loan tenure progresses.
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Known as the ‘step-down repayment’ option in banking parlance, this arrangement enables the borrower to pay higher EMIs during the initial years, so that the burden is lower during the latter part of the repayment cycle. This option is typically opted for by borrowers who expect their incomes to dip in the years to come. Also known as Flexible Loan Installment Plan (FLIP), this repayment plan works well for those who have bought a property in the middle part of their working life and are nearing retirement. This option also works well for those who have their parents as the co-applicants in their home loan application.
The catch: The interest outgo will be higher in this arrangement initially. It would make sense to prepay the loan, as soon as the EMIs start decreasing.
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This option is usually for purchase of under-construction properties. In this case, the entire loan amount is not disbursed in one go but based on the progress of the construction of the project. In this option, the borrower has to pay only the interest component of the loan amount that has been disbursed till date and pay the EMIs later. So, if you have applied for a home loan of Rs 50 lakhs, the bank may disburse 25% of the loan amount once the basic structure of the building is complete. So, you will be paying interest on 25% of the loan amount, in this case.
This option allows a borrower to fix his EMI until the property is ready to move in, allowing him to repay his loan quicker. How so? If you pay a fixed amount every month, despite the tranche-EMI option, you pay more than the interest component of the amount disbursed so far. The extra money goes toward the repayment of the principal amount.
The catch: Buyers cannot avail of the tax benefits offered under Section 80C of the Income Tax Act, towards payment of the home loan principal amount, as initially you are paying only the interest component. This remains true till the property is ready for possession.
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Linking home loan account with savings
Some banks also allow linking of your home loan account with a current account. All the money lying unused in your current account lowers your interest payment liability towards your home loan. This means that the interest liability on your loan will be calculated, based on the money available in your current account. This facility also lets you withdraw money from your current account, if need be. This means that while your interest amount would reduce, you will also have easy access to liquidity. Public lender SBI, for instance, offers this product under the name SBI Maxgain. Although keeping the excess money in the current account does not qualify as prepayment, it provides you all the associated benefits.
The catch: To provide this facility, banks sometimes charge additional interest.
Leading private lender Axis Bank has launched a product under the name Fast Forward Home Loan, through which it offers EMI waivers to diligent borrowers. Under this product, the buyer does not have to pay 12 EMIs, in case they have been regular with the EMI payment. While six of the EMIs will be waived at the end of the 10 years of the loan tenure, the remaining six would be waived on the completion of 15 years of tenure. The minimum tenure for which this product is offered is 20 years. The minimum loan amount in this case is Rs 30 lakhs.
Another similar product by Axis Bank is its Shubh Aarambh Home Loan. This product too helps borrowers to get 12 EMI waivers, four each at the end of the fourth, eighth and twelfth year of the repayment tenure. This product allows you to borrow nearly 90% of the property value as the loan amount for a 30-year tenure. However, the upper limit of the loan is capped at Rs 30 lakhs.
The interest rate for the Shubh Aarambh Home Loan, as well as the Fast Forward Home Loan, is the same as the bank’s regular home loans.
The catch: The cap of home loan amount may act as a problem for buyers in big cities, where even affordable properties cost up to Rs 50 lakhs.
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For those applying for home loans in the middle part of their working life, the tenure could be a problem, if they opt for a simplistic repayment arrangement. For this category of borrowers products are available in the market, allowing the repayment tenure to continue even after your retirement age.
Public lender SBI has partnered with the India Mortgage Guarantee Corporation (IMGC) to offer a mortgage guarantee scheme for prospective non-salaried and self-employed home loan customers. The cover allowed a customer to borrow 15% additional money as a home loan.
ICICI Bank’s Extraa Home Loans, meant for salaried, as well as self-employed people, also allows you to enhance your loan amount by up to 20% and your loan tenure period by up to 67 years of age. In fact, salaried customers up to the age of 48 years get a loan under this scheme.
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The catch: In this loan secured by the IMGC, buyers have to pay for the mortgage that the bank buys from the insurer.
What is EMI waiver home loan?
A product launched by Axis Bank, an EMI waiver allows diligent borrowers to enjoy certain EMI waivers throughout their home loan repayment cycle. The bank offers this product under the names Shubh Aarambh Home Loan and Fast Forward Home Loan.
What repayment options are available to borrowers on home loan?
Apart from the plain repayment options, banks in India offer borrowers a variety of repayment options to cater to their specific needs. These include EMI waivers, deferred EMI payment, increasing EMI payment facility, decreasing EMI payment facility, linking of loan account with savings, tranche-payment facility, etc.
How much loan can I get through SBI’s Maxgain offer?
Buyers can increase their loan amount by up to 15% since this loan is secured by the India Mortgage Guarantee Corporation.
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