Look at effective interest rate on home loan offers

Availing of ICICI Bank's cashback offer will mean you lose the flexibility to switch or prepay the loan

Indian home loan borrowers, typically, are a scared lot. Despite the tax benefits — Rs 2 lakh annually on interest paid (Section 24) and Rs 1.5 lakh (Section 80 C) on principal repayment — they choose to prepay their home loans. According to industry estimates, the average holding period of a home loan is 8-10 years.     

Against this backdrop, ICICI Bank’s latest scheme offering one per cent cashback on each equated monthly instalment (EMI) to its home loan borrowers for loans with a tenure of 15-30 years, is interesting. The conditions for getting this benefit: Neither can you prepay nor can you switch. 

For a loan of Rs 20 lakh for 15 years at the rate of 8.35 per cent, the savings is Rs 35,134 (see table). If the same loan is for a tenure of 30 years, the savings go up to Rs 55,361. As Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com says: “Through the cashback offer, a new home loan customer can reduce his effective rate of interest by approximately 10-20 basis points.”   

Customers can avail of the cashback offer in two ways: It can be used either to reduce the principal outstanding or it can be credited in the customer's bank account and used for any purpose. According to Kukreja, if a customer adjusts the cashback received against the loan’s principal outstanding, his total interest outgo over the tenure of the loan will come down considerably. For example, on a home loan of Rs 30 lakh for a tenure of 30 years at 8.35 per cent, by adjusting the cashback against the principal outstanding, a customer can save around Rs 3.2 lakh over 30 years. But, if he opts to get the cashback amount credited in his account, he saves only around Rs 80,000.

The cashback on EMIs will not get credited to the borrower right away. It will be credited for the first time after the 36th EMI (or three years), and subsequently after every 12 EMIs (at one-year intervals).  

A prospective customer should consider the home loan rate being offered to him. “A good customer can get a home loan at an interest rate of 8.35-8.40 per cent today. He should compare ICICI Bank's rate with that offered by others. If the rate he gets from ICICI Bank is the best, and the cashback is over and above that, then he should take it. But if he is offered a higher rate and it becomes comparable to what others are offering after factoring in the cashback, then he should consider going with others,” says investment advisor Harsh Roongta. Borrowers should keep in mind that ICICI Bank's offer is a deferred benefit. “If you can get a lower home loan rate upfront, you should opt for that,” Roongta says. 

Interest rates on ICICI Bank's home loans begin from 8.35 per cent and move higher, depending on a variety of factors such as amount, sex (women borrowers get a lower rate), fixed or floating rate, salaried or self-employed borrower, and so on. 

In home loans, older customers usually end up paying a higher interest rate on their home loans than new customers. An older customer's only defence against a higher rate is to transfer his loan to another lender. "A scheme such as this is meant to act as a deterrent against switching. If you switch before three years, you will lose out on the cashback benefit that has accrued till then," says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA). Kukreja adds that a customer will also lose out on the cashback if he prepays the loan, as most borrowers in India do.