Flexible instalments

HOME LOANS

As EMIs get flexible, you may choose to alter the payment quantity and schedule.

Is your wife planning to take a break from her job to look after the children for a few years? If so, you may want to consider restructuring your home loan to adjust to a lower income. There are several products in the market that allow you to plan and even change your Equal Monthly Instalments (EMI).

HSBC has a product which allows you to increase or decrease your EMI depending on your cash flows. Says Sangeeta Pendurkar, chief marketing officer, HSBC, "Our product allows the customer to change his EMI once a year , helping him adjust to his income."

The EMI can be either decreased or increased by 15 per cent of the EMI pertaining to that period, and this can be done till the last but one year of the loan.

ICICI Bank has a similar product aimed at the younger lot. It allows EMIs to increase gradually over the life of the loan, as the customer's income rises. The initial EMI remains constant for two years.

A new EMI is put into place for the next five years, and after that, a new EMI comes into force for the rest of the period till the loan ends. The product is offered for 15-20 year loans, and does very well with those looking for a house upgrade.

Says Rajiv Sabharwal, head, mortgages and real estate, ICICI Bank, "Several people realise after two or three years, that they should have bought a bigger house because the entry and exit costs are so high. This structure helps them do that. Besides, they can take better advantage of tax breaks since their incomes would increase with time as would their EMIs." ICICI also has other products where the EMI can be changed in accordance with needs.

It's like the concept of progressive income tax: you bear the burden you are able to bear. However, there's no getting away from your financial obligations.

"In order to ensure that the load is distributed evenly," says HSBC's Pendurkar, "the load is amortised on an annual basis over the remaining tenor. So the payments do not get bunched up towards the end of the loan period."

While flexibility is good, one is advised not to decrease the EMIs unnecessarily. Ultimately, you're just postponing the payment. You need to be particularly careful if the repayment period cannot be elongated (as in the HSBC product mentioned above) "" because that could mean very steep payments towards the crunch end.

Also, if you have a floating rate loan, with the interest rate changing on the basis of prevalent circumstances, you have to worry about a possible rate shock.