There are several products in the market which are tailor-made for you.
With both State Bank of India (SBI) and Housing Development Finance Corporation (HDFC) deciding to continue their teaser rates till this month-end, home loan seekers now have the option to lock onto low rates for the next few years.
However, there are some other features of these loans that restrict a person’s ability to borrow. For instance, both SBI and HDFC products calculate the eligibility based on their prime lending rate, and not on the first year’s rate of interest.
For SBI, the eligibility is based on the prime lending rate minus 1.75 per cent. This means the bank will judge your repayment ability at 10 per cent rate (11.75 per cent State Bank Advance Rate — 1.75 per cent), and not on the 8.5 per cent it offers for the first year.
Similarly, though there are no prepayment penalties, such loans do not allow flexibility of payment. Consider this situation: A working couple, aged 42 and 38, may not get jointly a 20-year dual rate loan. The reason? Despite a joint loan, the repayment period will depend on who retires first.
Obviously, the initial rate of interest is only one factor. R R Nair, director and CEO, LIC Housing Finance, says: “A home loan is a long tenure product; most people take it for 15 or 20 years. A decision to borrow should not be based on the initial rate of interest.”
Here, we look at some other options wherein a customer can benefit from more flexible rules.
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Step-up repayment facility (Surf): Many experts draw a comparison between this product and dual loan rates. In Surf, the borrower enjoys smaller equated monthly instalments (EMIs) in the initial years. In the later years, the EMI increases over fixed intervals, as the person’s career progresses.
In this loan, the bank takes a call on the applicant’s professional graph. Accordingly, they decide on the amount to be disbursed. As the banks calculate the eligibility on the future earning, a person gets a higher amount in a step-up product.
Some banks have this facility for professionals, such as doctors, chartered accountants and lawyers. Some, such as Deutsche Postbank, offer this loan to the salaried in big organisations, like top audit firms. Typically, the loan is divided into phases, say, one-two years, three-seven years, seven-15 years, and so on. The EMI increases in each phase. Some may increase it every year by a defined percentage, say, 10 or 15 per cent annually.
“Though this product may offer higher eligibility and ease of payment, it would require better management of an individual’s finances. This is because the EMI is impacted not just by the pre-defined increase but also by the movement in the interest rates, which can eat into a person’s finance,” said Malhar Majumdar, certified financial planner.
Flexible loan instalment plan (Flip): This loan is apt for the couple we took as an example earlier. The working of this loan product works is the exact reverse of the step-up scheme. In the initial years (up to the retirement of elder applicant), banks keep EMIs high. They reduce towards the end of the tenure. A younger person can also make use of this scheme if he wants to apply for a joint loan with either of the parent.
However, it is not just restricted to joint accounts. A person at the peak of his career, say at the age of 40, can go for Flip. As the payment in the initial years is high, the customer ends up paying lower interest too. Almost all banks offer this product.
Home saver account: In this product, the lending bank links your home loan account with a current account. The funds that you park in the current account help you to lower the interest on the home loan. While calculating the monthly interest on your home loan, the bank minuses the funds in the current account from the principal outstanding and then levies the interest.
This account works on the lines of an overdraft account. The borrower is free to withdraw money as and when required. However, according to experts, the calculation of interest in this kind of loans is tedious. It is difficult for a lay investor to understand. This scheme is also slightly expensive, by around 0.5 per cent, compared to the floating rate product of a bank.
This scheme is ideal for business owners who can park excess money in a current account. The current account does not earn them any interest otherwise. Experts say this scheme can help the borrower save a lot of interest, provided sufficient money is kept in the linked current account.
Most of the private sector banks offer this scheme, like ICICI Bank’s Money Saver, HSBC’s Smart Loan and Standard Chartered Bank’s Home Saver. Some, such as Standard Chartered, have two such products. Apart from the regular scheme, the bank has launched HomeSaver Plus that allows you to link up to three accounts (both savings and current) to the home loan. The borrower can even link accounts belonging to his family members.