POW :: Only of use in a cash crunch

MEERA SIVA | 31st Aug 2014 | The Hindu Business Line

Bajaj Finance’s new home loan scheme offers an EMI holiday for three months before you have to begin payments

If you are evaluating loan options for buying a ready-to-occupy home, there is a new choice to consider. Bajaj Finance has come out with a loan product that offers you a three-month holiday before you start paying EMIs.

What’s on offer
Called the ‘3 EMI Holiday’ home loan scheme, you need not make any interest or principal repayments in the first three months after getting the loan. But note that this holiday is not the same as a moratorium, which is typically offered on education loans. Under a moratorium, the interest computations start after a delay. What is different in this scheme is that the interest payments that are due in the first three months are added to the outstanding loan amount. In addition, the loan duration is reduced by three months.

For example, say you avail yourself of a 20-year loan for ₹30 lakh at 11 per cent interest. The EMI under a regular home loan will be ₹30,966. The interest portion for the first three months works out to ₹82,404.

So, under the 3 EMI Holiday scheme, your loan balance will increase by this amount. Accordingly, your EMI dues will be ₹31,928 for 237 months, starting three months after the loan was dispersed.

The loan is not offered for under-construction property and can only be availed of for completed homes. The amount of loan you can avail ranges from ₹25 lakh to ₹15 crore.

Our take
The loan product suits home buyers that have short-term cash flow problems. “The 3 EMI holiday option would ensure that our customers are comfortable during the first three months of their property transaction,” says Deepak Reddy, Senior Vice-President, Mortgages, Bajaj Finance.

But there are a few factors to consider when deciding if the product is suitable for you. First, the interest rates seem to be on the higher side. The interest rate for salaried borrowers ranges between 10.4 per cent and 11 per cent, while the rate for self-employed loan takers is higher at 11-11.75 per cent.

“The rate of interest is a tad higher than the standard loans available from other NBFCs and banks in the current market,” says Sukanya Kumar, Founder & Director, RetailLending.com, a loan advisory firm.

Second, the trade-off for the cash in hand in the first three months of the scheme is higher EMI payments. You need to evaluate if you can handle the higher EMIs. In the example, the EMI increases by nearly ₹1,000. You also pay interest on the ₹82,400 that you did not pay in the first three months. This leads to an additional outflow of ₹52,750 over the life of the loan.

Third, you may also want to consider the tax aspects of the home loan.

The tax benefit on interest payments can be claimed as a deduction under Section 24, with a limit of ₹2 lakh for a self-occupied property. There is no limit on the interest deduction for a home that is rented out.

Interest costs account for the largest share of EMI payments in the initial period of a loan.

So by deferring payments under this particular scheme, your interest payments in the first year are reduced. This may lower the deduction you can claim with respect to interest payments in the first year, bringing down the tax benefit.

(This article was published on August 31, 2014)

Source : http://goo.gl/Ldlihb

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