Home loans: Convenience of payment as important as rates

Home loans are not all about low interest rates. The most important factor of a home loan is serviceability of the equated monthly instalment (EMI). Lenders too realise this. For the convenience of the customers, many banks have come up with products that can suit individuals needs.

Here’s a look at some products that offer customers convenience of payment:

Loan with savings a/c
State Bank of India (SBI) markets this products as Maxgain, ICICI calls it Money Saver and Standard Chartered has branded it Home Saver. This home loan product is meant for borrowers who have cash but need liquidity.

When you take a home loan from any of these institutions, you are required to open up a savings account with them. The money kept in the account is considered as principal. Banks deduct the balance in savings account from the principal and charge interest on the remaining amount.

For Instance, a borrower takes Rs 20 lakh loan from a bank. He keeps Rs 5 lakh in the savings account. While calculate the EMI, the bank will charge interest on Rs 15 lakh.

Most of the banks calculate interest on a daily basis and charge it at the end of every month. The customer has the freedom to withdraw and use the money any time.

Interest calculation is a deterrent for these loans. “As EMIs fluctuate month-on-month, depending on the usage of cash in savings account, some customers prefer to stay away as they cannot ascertain the method of interest calculation,” said Tushar Narvekar, director, Dream Finance, a direct selling agent (DSA).

Hybrid loans
For those who cannot decide whether to go for a fixed or floating loan, banks have combined the two. In this product, lender charge fixed rate of interest on half the loan and floating on the other half.

“This product makes sense when interest rates are falling, like it’s happening currently, and there is general perception that they may go down further,” said an investment adviser. This enables borrowers to take advantage of the falling interest rates.

Almost all lenders have this option including ICICI, Bank of Baroda, Corporation Bank et al. Deutsche bank calls it Flexi Home Loan, whereas HDFC offer this under a scheme called 2-in-1 Home.

Many other banks, such as Kotak Mahindra, offer this loan with variation. Rather than keeping half fixed and half floating, lenders keep the loan fixed for a particular tenure and then make it floating. In case of Kotak, the fixed tenure is 3 years. SBI and Canara Bank offer fixed rate for one year.

Structured loans
Deutsche Bank has two products called as StepUp Home Loan and StepDown Home Loans. In the former once can avail of smaller EMIs in the initial period. The EMI increases with the progression of the loan. “The interest payment in this loan is higher as banks charge only interest in the first few years,” said Vinod Prajapati, director, Money Point, a DSA. This loan also increases the eligibility of a borrower as it takes future earning potential.

In StepDown loan, the borrower pays higher EMIs in the initial years of the loan tenure. The EMI reduces in the later years. Other Banks that offer these loans include HDFC and Union Bank of India.

In case you prefer a certain financial institution and its product list does not mention these products, talk to the lender. “Many banks do not market these products formally. But they would be willing to work out similar repayments options,” said Harsh Roongta, CEO, Apnaloan.com.