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Cash Cushion
Home loan providers are offering a series of options to make repayment schedules flexible and help you factor in future rise or fall in income
Interest rates are slowly but surely on the rise and there aren't any cushions. But what home loan providers are trying to do is make the repayment burden as flexible as they can.
Here are some of the innovative repayment options banks and financial institutions are offering.
One option being increasingly offered by most home loan providers is step-up repayment facility. Under this option, borrowers can link the repayment schedule with expected growth in income. It also helps a homebuyer get a bigger loan than the normal housing loan.
While a person can opt for a higher amount, he has the option to pay a lower equated monthly instalment (EMI) in the initial years and subsequently a higher amount in proportion with the assumed increase in income.
HDFC provides such an option, whereby the EMIs are increased in stages. For instance, for a 15-year loan,
the repayment schedule is divided into three stages. The EMI is stepped up at the end of the third and the seventh year.
The EMIs for the first seven years constitute a large part of interest and a nominal sum of the principal portion. For the balance eight years, the EMIs are stepped up to recover the outstanding principal and interest for the remaining term of the loan.
A person who opts for this scheme can maximise tax benefits on the interest paid on the loans as it defers payment of the principal.
Another option is flexible loan instalment plan. This is suitable for individuals whose repayment capacity is likely to change during the term of a loan.
Under this option, the loan is structured in such a way that the EMl is higher during the initial years and subsequently decreases in proportion to the reduced income of the customer.
For example, if an individual has 10 years of service left and his wife 15, then a 15-year loan can be structured in a way that a higher EMI, serviced from the joint income, is paid for the first 10 years and a lower EMI, serviced from only his wife's income, is paid for the next five years.
One enhancement tool HDFC offers is balloon payment. It increases the loan eligibility of a customer without increasing the EMI by assigning securities like National Savings Certificate and LIC policies to the loan provider.
Under this option, the present value of the maturity amount of assigned securities is combined with the loan amount to arrive at the enhanced loan eligibility. The EMI is calculated on the net loan amount, which is the total loan less the present value of the maturity amount of the securities.
For example, if a person is eligible for a loan of Rs 15 lakh and the maturity value of his securities is Rs 1 lakh, he will get a loan of Rs 16 lakh but his EMI will be calculated on Rs 15 lakh.
EMI acceleration is another facility under which a customer has the option to increase EMIs every year in proportion to the increase in income.
HSBC has recently introduced this option termed My Home, whereby every year one can decide to pay an EMI, which is either 15 per cent higher or lower than the regular EMI.
An ingenious option offered by banks is linking the home loan with a bank account. HSBC offers it under a plan called Smart Home, whereby a person gets a current account with the home loan and all he needs to do is put his usual savings, from other accounts, into the Smart Home account. Depending on the savings he puts into the account, he can reduce the quantum of interest paid by up to 50 per cent.
The loan interest is calculated on the principal outstanding minus the savings deposited in the Smart Home account every month, over and above the EMI.
While all these options sound attractive, it is worthwhile to remember that there is a price for every
benefit. For example, HSBC charges a higher interest rate on Smart Home and My Home loans compared with a normal loan.
On the other hand, HDFC officials say their bank offers such options as added benefits for customers and thus do not charge any additional fee or higher rate of interest for such benefits.
Keeping aside the extra charges, the options themselves sometimes result in higher interest costs. For instance, when a person pays a lower instalment in the first year, a larger portion of the loan component stays outstanding, which drives up interest costs.
Plus, there's the hassle of reissuing cheques at higher values and reworking budgets every year.
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