Jairam Sridharan, senior VP and head (consumer lending and payments) of Axis Bank, says their new product is for those who can’t prepay their loans or who do so towards the end of the term. “Around 10-15 per cent borrowers prepay in the first five years of a loan term, 50-60 per cent prepay in 5-10 or 15 years and the remaining 25-30 per cent prepay in the last few years,” he explains.
Axis Bank’s Happy Ending Home Loan comes with an in-built equated monthly instalment (EMI) waiver. If you pay your EMIs on time, the bank will waive the last 12 EMIs automatically. To get this benefit, you need to stick with the loan for at least 15 years. The minute your loan tenure falls below 15 years (if you prepay), you will no longer be eligible for this benefit. For a home loan of Rs 50 lakh at 11 per cent floating rate, the EMI per lakh of loan would be Rs 1,032. And, such a customer would save up to Rs 6.19 lakh with this product.
“Our aim is to keep the customer with us and reduce the churn,” Sridharan says. Industry experts are of the view that borrowers don't usually hold on to a home loan for 15 years or more, one of the criteria to get the EMI waiver. With this scheme, Axis is trying to prevent customers from shifting out in the 12th or 13th year. But, if customers move out in the initial period, the bank won’t be able to do much, say experts.
If you already have a home loan, you can shift to Axis Bank’s new scheme but your 'clock will start at zero', says Sridharan. This means the number of years you've repaid till now will not be considered for the 15-year waiting period. But, you need to have a loan for 20 years or more to get this benefit.
According to Adhil Shetty of BankBazaar.com, the good part of the product is that it has no catches. “Given that the bank is offering a floating rate of 11 per cent, according to our analysis, for a loan of Rs 50 lakh for 19 years (as 12-month EMI will be waived off), the effective rate of interest would be 10.75-10.80 per cent,” he says.
However, for an advantage of 20 basis points, is it worth holding on to debt for 15 years? Maybe not. At present, there are many banks that are offering a lower rate of interest than Axis Bank. Like the country’s largest lender, State Bank of India, is offering a floating rate of interest of 10.4 per cent for loan amounts ranging between Rs 30 lakh and Rs 75 lakh. You will save 40 bps more than what Axis Bank’s product will help you save (assuming the rate of interest will remain constant for the entire loan term).
Similarly, PNB is levying an interest of 10.5 per cent for loans less than Rs 75 lakh and 10.75 per cent for a loan more than that. Union Bank of India is offering a rate of 10.5 per cent for loans up to Rs 30 lakh and 10.75 per cent for a loan of Rs 30-75 lakh.
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Says Harsh Roongta of Apnapaisa.com, “It makes sense to opt for a bank offering a lower rate of interest instead.” He adds, “The problem with this product is that the benefits are very delayed. Typically, a loan gets repaid in seven-eight years. Therefore, to wait for 15 years for EMI waiver will be very long.”
Experts say the other advantage for borrowers is Axis Bank is offering the same rates for loans with EMI waiver scheme and ones without this option. Says a public sector banker, “By waiving off Rs 6 lakh, the bank is at very little loss, as its main income is the earnings from interest. As for the customer, the bigger burden is the interest cost. That, towards the end of the loan term (15 years and onwards), is only a small percentage.”