Housing loan seekers must analyse whether the special repayment options offered are beneficial.
For many customers of home loans, the EMIs (equated monthly instalments) remain constant throughout the tenure. For example, if a loan of Rs.20 lakh is taken at nine per cent interest and the tenure fixed is 15 years, then the EMI will be Rs.20,286 throughout the tenure if the interest rate is not altered.
However, these days, banks and home finance companies offer a number of repayment options, which are a bit complex. Here is an effort to analyse them.
SURF
If you are a professional seeking a home loan and having good employment, no bank or home finance companies will like to lose you as a customer.
They will lure you with a higher loan amount by offering a telescopic repayment facility, also called as the step-up repayment facility (SURF), under which the EMIs will be less initially and will gradually increase over fixed intervals.
Let us suppose you are eligible for a loan of Rs.20 lakh under the regular scheme with EMIs of Rs.20,286 for 15 years at nine per cent interest. Under SURF, you will be eligible for Rs.25 lakh for the same tenure and interest, but the EMI will be Rs.18,750 for the first 24 months, Rs.25,357 for the next 60 months and Rs.29,325 for the balance 96 months.
On the face of it, it looks attractive. For a higher loan, the initial EMIs are less. But it is beneficial to the lender and not you, as in the first two years, the lender will be collecting only interest. As a result, the total interest payable over 15 years will be 10 per cent more than in the normal scheme.
For a loan of Rs.25 lakh under the regular scheme, the total interest payable will be Rs.2,064,133 in 15 years, whereas in SURF, the total interest payable will be Rs.2,286,608, an additional interest of Rs.2,22,475. Hence SURF scheme is not advisable.
FLIP
If you are applying for a home loan with your father/mother who is left with less service (or if your service left is less than 15 years and your wife has more service left), in the regular scheme, your loan eligibility will be less as the tenure offered will be restricted to the service left for the elder applicant.
Under these circumstances, the flexible loan instalment plan (FLIP) comes in handy. It works the exact reverse of the SURF scheme. In the initial years (up to the retirement of elder applicant) EMIs will be higher and for the balance period, the EMIs will be much lesser.
For instance, a man is left with five years of service with a salary of Rs.40,000 a month and his wife has 12 years’ service and her salary is Rs.25,000 a month. In the normal scheme, the couple will be eligible for a loan of Rs.12.5 lakh for five years’ tenure, considering 40 per cent of the combined income towards EMI and interest rate of nine per cent. If you opt for FLIP, the eligibility will get enhanced to Rs.16.5 lakh. For the first five years, the EMI will be Rs.26,000 approximately, and for the balance seven years, it will be Rs.10,000.
This scheme is advisable as applicants will get a higher loan amount and end up paying lesser interest compared to regular schemes.
Home saver account
In the regular home loan, you go on paying EMIs comprising interest and principal amount. It is a non-transactional account. In the home saver account, the home loan account is made transactional by connecting it to a current account. It works like an overdraft facility and the borrower can park his surplus savings in the home saver account and can withdraw the surplus as per his needs.
Till the surplus (other than EMI) amount is lying in the account, it will earn same interest as that of loan. Such interest earned is accounted as principal loan amount repaid on a daily product basis. In this scheme, one can save a lot of interest payable on home loan as tenure reduces considerably. The scheme is ideal for business class applicants, who will have a current account for their business deals, which earns no interest and will have a high turnover on daily basis. The scheme can be opted for by high net-worth individuals who can keep surplus funds parked in their home loan account.
Accelerated repayment
Under this scheme, the borrower is allowed to increase his EMIs as and when his income is increased and he can pay lumpsum amounts, which will be apportioned to the principal loan outstanding. In this scheme, the loan gets repaid faster resulting in a lot of savings in interest payment and the long-term debt closes much earlier.
This scheme is good for salaried class borrowers, as whenever they get an increment, or disposable income is increased, they can use it for increasing the EMI amount or use it for part prepayment.
The banks and the home finance companies will try to lure you by offering many special schemes, saying that the scheme is custom-made for you and will try to push you to seek a higher loan amount. This is because there is surplus credit available and fierce competition among banks and home finance companies is making it difficult for the lenders to attract good customers.
Hence, before finalising the option, the customer needs to thoroughly analyse whether the special repayment option offered is really beneficial.
News Published Under: The Hindu