ATM :: Flexibility at a reasonable cost


RADHIKA MERWIN | February 14, 2016 | Hindu Business Line
SBI’s FlexiPay lets you to borrow more. But don’t bite off more than you can chew

ATM

Buying a home is a major milestone for most young people with a secure job.

But it can also be one of the most stressful financial decisions you take at the start of your career, as it can set you back financially by a few years.

If you have put off buying your dream home because you could not afford to pay the hefty equated monthly instalments (EMIs), the recently launched home loan product by State Bank of India could appear attractive.

For one, the product, known as SBI FlexiPay, helps you get a higher loan amount than you would normally be eligible for under a regular home loan.

Two, for the initial three-five-year moratorium period, you will pay only the interest on your loan, after which you will have to pay moderated EMIs. These will be stepped up in later years.

The ability to borrow more and the lower EMI in the initial years may tempt you to go for that sprawling villa you have been eyeing for some time now. But here are a few things you need to take note of before signing up.

Most banks decide on your eligible loan amount based on the value of the home and your affordability. Banks offer loans at about 75-80 per cent of the value of the house (loan-to-value ratio). But banks may offer you a lesser amount than this if your affordability is lower.

Do you need more?
Say, for instance, you decide to buy a house worth ₹80 lakh. Based on a 75 per cent loan-to-value-ratio, the bank can offer you a loan up to ₹60 lakh. But, based on your income, the bank may offer you only a ₹50-lakh loan.

Under SBI’s FlexiPay, you can now be eligible for ₹60 lakh (20 per cent more than that under a regular home loan).

The reason for the bank’s largesse is the assumption that your income level will increase over the years, and you will be able to pay the additional loan amount comfortably.

It may seem an attractive option for you, too, as the additional loan amount will bring you closer to your dream home.

But it will also mean that you are stretching yourself thinner on your income. If earlier the bank offered you a loan that translated into an EMI of half your monthly income, you will now be able to get a loan in which your monthly payments are maybe about two-thirds your monthly income.

You may want to assess your monthly expenses to see if you can actually afford a higher loan.

Honeymoon period
To relieve you of the additional burden on your EMI (on the higher loan amount), SBI makes the deal sweeter by allowing you to pay a lower amount in the initial years.

The product allows you to pay only the interest component in the first three (for a ready-to-buy home) to five (under construction house) years.

Hence, on a ₹60-lakh home loan at 9.5 per cent for 25 years, while your EMI works out to about ₹52,420 under a regular home loan scheme, under the new SBI scheme, you have the option of paying only about ₹47,500 a month (the interest portion) for the first three years.

A clear saving of about ₹4,900 a month for three years sounds like a good deal. But this respite comes at a cost.

The EMI on your home loan, normally, goes towards payment of both the principal and the interest components of the loan. In the initial period, say, three-five years, a chunk (85-90 per cent) of your EMI goes towards payment of the interest component.

As you move towards the end of your loan period, the major portion of your EMI goes towards paying your principal amount.

Even so, by paying only the interest component in the first three years, you end up increasing your total outgo on the loan by the end of the tenure.

In the above example, after three years, on your principal of ₹60 lakh, the bank will calculate EMI based on the original tenure of 25 years (assuming the same rate of 9.5 per cent).

So your monthly payment from ₹47,500, will go up to ₹52,420, a straight 10 per cent jump from the fourth year.

So, you will have to ensure that you can afford the bump up in monthly payment after three years.

Making good
SBI calculates your EMI from the fourth year, based on the original tenure (25 years) and not the remaining tenure (22 years) after the three-year principal moratorium period. This is to start you off with a lower EMI.

Remember, if the loan is spread out over a longer tenure, it results in lower monthly payment. Since you pay a lower EMI from the fourth to the sixth year, SBI gradually steps your EMI from the seventh year onwards, to make good the lower amount. So, from ₹52,420, the bank will increase the EMI by about 5 per cent to about ₹54,900 from the seventh year.

In the above example, under SBI’s FlexiPay scheme, you may pay about ₹4 lakh more on your loan over the tenure of 25 years compared with a regular home loan.

Bottomline
The scheme offers you flexibility at a cost that is not too high. But be sure that you are able to afford the higher EMIs in subsequent years.

Source : http://goo.gl/dpDt3z

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