However, if the borrower can manage his EMI from the very beginning, he should not opt for moratorium even if the offers sound tempting
By: Adhil Shetty | Published: June 14, 2016 6:05 AM | Financial Express
Recently, a major public sector bank launched a home loan scheme with a moratorium for three to five years. In it, customers have the option of paying just their interest during the moratorium, after which their EMIs are gradually stepped up in the following years. This is meant to make things a tad bit easier for customers—young professionals especially—to repay their debts. It now remains to be seen other banks start offering loans with similar features.
Moratorium on loans is not a new concept. Education loan providers have been offering this benefit to students to allow them some time to find a job in order to start repaying their debts.
The real estate sector has gone through a rough phase in the past few years. The industry awaits a revival though there have been intermittent spurts in the economy at large. Therefore a home loan with an EMI moratorium would benefit potential home buyers who have been waiting for an increase in income or a turnaround in the economy.
What is a moratorium?
A moratorium is suspension or delay of an activity. In case of bank loans, a moratorium may mean not having to pay EMIs in part or full.
In the first type, no payment is made during the moratorium. In the second, which is more common, the borrower pays only the interest during the moratorium. After the moratorium, the borrower must start repaying his loan in full, as per his agreement with the lender.
Pros and cons
Let us analyse the advantages of a moratorium, especially of the first kind where absolutely no payments are required. This is preferred by borrowers facing short-term problems in paying their EMIs but expect their financial situation to improve in the near future.
For example, the borrower may have had an emergency expenditure or a loss of job, leaving him incapable of repaying his loan for a short period.
A moratorium on his loan would help him immensely.
It also provides borrowers the breathing space to manage and plan their finances for the next few years during the tenure of the loan. Moreover, the interest paid during the moratorium is lower than the actual interest rate at which the loan was procured. The difference can be as high as 1%.
Additionally, borrowers may be eligible for higher amounts as home loan under this scheme than they would in a standard loan. It allows potential home owners to dream of a bigger home-buying budget without having to worry about the downside of paying a bigger EMI straightaway, thanks to the moratorium and the gradual stepping up of EMIs which pairs very well with a gradual increase in the home owner’s income as well.
But there are some pitfalls of the scheme as well.
First, in most cases, the lending institution agrees to provide moratorium only on the principal amount. The borrower has to pay the interest right from the disbursement of the loan. At the start of your repayment tenure, the interest component of your EMI is much larger in comparison to the principal. Hence there is effectively not much to save for the borrower.
For example, for a 20-year loan for R30 lakh taken at a rate of 10%, your EMI works out to be R28,951, or R202,655 annually. After one year of repayment, you would have repaid only R28,356 of your principal whereas most of 86% of your repayments—R174,299—would have contributed to interest. Hence your absolute savings in terms of principal repayments would be small.
Additionally, the EMI amount will be higher after the moratorium period is over. This is despite low savings in the initial few years of interest payment. For example, suppose a borrower has taken Rs 25 lakh as home loan for 20 years with a moratorium periodof two years. In these two years, the borrower is supposed to pay the interest only. After the moratorium, the borrower has to repay the EMI in the remaining 18 years. Naturally, the EMI will be much higher since the repayment tenure got smaller.
What borrowers should do
If you are facing a cash crunch and expect it to resolve in a few quarters or years, a home loan with a moratorium is a good option. Just like an education loan, a moratorium is required because all borrowers may not be able to repay immediately after borrowing. However, if you are purely looking at temporary savings and relief, this is not the right choice.
At the same time, if the borrower can manage EMI from the very beginning, they should not go for moratorium even if the offers sound tempting. Keeping loans unpaid for longer increases the outflow because of interest being continuously added to the principal.
Finally, if you are really keen on taking the advantage of a home loan with moratorium, take a decision based on three criteria—the moratorium period, interest rate in the moratorium period, and the EMI that you are expected to pay after the moratorium period is over.
The writer is CEO, BankBazaar.com
Source : http://goo.gl/qFVDAh
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
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.
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.
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.
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
Targeting working professionals, the FlexiPay Home Loan will enable young working professionals to get higher amount compared to their eligibility under normal schemes
PTI | Mon, 1 Feb 2016-11:30pm , Mumbai | DNA India
State Bank of India (SBI) on Monday launched a new home loan scheme offering higher amount and up to five years of interest moratorium, which on the face of it looks like the controversial ‘teaser loans’.
To woo young customers, top lender State Bank of India (SBI) on Monday launched a new home loan scheme offering higher amount and up to five years of interest moratorium, which on the face of it looks like the controversial ‘teaser loans’.
With the “FlexiPay Home Loan”, the bank seeks to boost its home finance portfolio by wooing young borrowers, offering them an interest moratorium for an initial period of 3 to 5 years and then pay moderate EMIs.
When contacted, SBI, however refused to name it as the now-discontinued ‘teaser loan’, saying it is not offering any discount in interest rates or offering more loan to value.
“It is not a teaser loan. There is no change in the interest rates and loan to value ratio. Taking into consideration the net monthly income of a customer, the EMIs will be decided,” Managing Director for National Banking Group Rajnish Kumar said.
Targeting working professionals, the FlexiPay Home Loan will enable young working professionals to get higher amount compared to their eligibility under normal schemes.
“To lower the impact of such additional loan amount on monthly repayments in the form of EMIs, the customers availing home loan under the scheme will also be offered the option of paying only interest during the moratorium (pre-EMI) period of 3 to 5 years, and thereafter, pay moderate EMIs,” SBI said in a statement.
The EMIs will be stepped up during the subsequent years, the bank said, adding the move is a “recognition of the special needs of this growing aspirational segment, and to bridge the gap between affordability and demand for quality residential spaces.”
Last year, SBI chief Arundhati Bhattacharya suggested to RBI Governor Raghuram Rajan to allow sub-base rate loans, which Rajan’s predecessor D Subbarao forced lenders to stop.
Faced with high liquidity in early 2000s, SBI, under O P Bhatt, launched a loan scheme in November 2010 which came to be called ‘teaser loan’. It offered lower interest rates in the beginning but higher EMIs as the loan tenor matures.
Critics had warned this would create a credit crisis and if the overall economy falters borrowers would be overburdened.
Rivals, led by the then market leader HDFC, initially criticised SBI, but soon they, too, followed it up with similar schemes. The teaser loan scheme catapulted SBI to the No 1 slot in the home loan space.
Source : http://goo.gl/IgbvwV
Creditvidya.com | Last Updated: January 03, 2016 14:11 (IST) | NDTV Profit
A New Year brings with it fresh hopes, aspirations and dreams. Many of us like to make New Year resolutions, or promises we make to ourselves to achieve something, whether for mental, spiritual, financial or emotional betterment.
If your resolution for the New Year 2016 is to buy your dream home, here are some useful tips you can use:
Save for down payment
Planning to buy a house requires that you get your finances in order as buying a house involves a huge financial commitment. If you are planning to take a loan for buying a house, remember that banks do not offer 100 per cent of the property value as loan. Depending on a bank’s policy and loan amount, the loan value may be 80 per cent to 90 per cent of the property value.
Therefore, if you are buying a Rs 50-lakh house, you need to have Rs 5 lakh to Rs 10 lakh available to make a down payment. Also remember: the higher the self-financed amount the lower is the EMI and overall interest burden. So make sure you save enough for the down payment or plan ahead how you are going to meet the requirement – whether it is by dipping into your deposits, withdrawing from your PF corpus or liquidating your investments.
Focus on your CIBIL score
When you apply for a loan, apart from making sure that you meet the eligibility criteria, financial institutions also look at your CIBIL score. CIBIL score is a reflection of how you have treated your loans in the past; it will reflect your payments and defaults right from the days of your first credit card or your first loan. So in case you are preparing to take a loan, it is important that you focus on your CIBIL score and try to improve it (if required) at least a few month in advance. Credit restoration is a process that requires time and patience depending on how good or bad the situation is.
Even in case of an average score, it makes sense to try and improve it as a higher credit score could get you a better deal in terms of interest rate and also give you a choice about which bank to borrow from.
Do some homework
Before you actually apply for a loan or choose a house, it is a good idea to start your homework months in advance. On the property front, it is important that you focus on the area that you planning to buy a house in and find out if there are any issues and concerns specific to that area, and also focus on the property prices and see if they match your budget. If you are buying a house from a developer, check about the credentials of specific builders and projects: whether they have the requisite approvals etc., when the handover of the property will take place if it is under-construction and so on.
Also check about the policies and rates offered by various banks for loans. Though rates may change over time but generally, changes are not too frequent or sudden. Some research will help you shortlist some banks as per the rates they offer, loan duration, eligibility criteria, and help you understand whether you meet them. All this information is available online. You will have sufficient time to rectify any shortfalls that may be there.
Other things to keep in mind
There are a few other things that can come in handy when you are planning to buy a house:
Have a budget in mind: This is the most important aspect. Keep in mind how much you can pay every month as EMI and how much you have saved as down payment.
Plan you Finances: A loan means a fixed outflow every month towards the EMI, so make sure that you have your finances planned for the future by factoring in this expenditure.
Check EMI online: EMI calculators are available online; check the EMI for various loan amounts and duration combinations to ensure whether it is sustainable for your take a loan with you current financial position.
Do not stretch your finances: While you may be tempted to buy your dream house, it is important to be pragmatic. Do not buy a house that will stretch your finances and make it hard for you to pay EMIs. Remember, it is a long term commitment!
Do keep a contingency fund: Do not completely exhaust your savings while making the down payment. Keep some amount separately as a contingency fund to meet any unforeseen situation. If your entire funds are tied in the house, you may face a liquidity crunch in the time of some crisis.
All journeys begin with the first step. So, if you want that you celebrate 2016 in your new house then start planning. Make sure is planning is comprehensive yet practical.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
Sukanya Kumar,Founder & Director, RetailLending.com | MoneyControl.com
Pre-EMI neither reduces your home loan outstanding, nor it brings tax benefits in under construction period. Opt for pre-EMI arrangement if and only if you have cash flow issues
When you borrow to purchase an under-construction property, you probably do not notice whether your repayment mode is a pre-EMI or EMI. All you know is you have to pay an ‘x’ amount every month. Some of you feel joy when your lender offers you the ‘facility’ of starting the EMI only after possession. You consider this as an opportunity to save money and consider this as a ‘flexibility’ offered by your lender which allows you to start the repayment only after you enter your new home.
But, before you accept that offer, understand the matter first. Here are some frequently asked questions and answers which may help you get the clarity-
What is EMI?
Equated Monthly Installment (EMI) is a repayment option where you pay both interest and principal to the lender via a monthly fixed payment. The interest payable throughout the loan tenure gets computed over a chart called amortisation schedule which portions the interest and principal in a descending and ascending order respectively.
What is Pre-EMI?
Pre-EMI is the only simple interest payable on the principal drawn for the number of days of usage, payable to the lender on a specific day of every month. Upon drawing down further amount, it keeps increasing since the interest payable on the principal drawn increases accordingly. This mode of payment is possible only in case of under- construction purchases where the loan disbursement happens in tranches.
How does one benefit from opting for either?
If you can afford to start paying the EMI, that is, both principal and interest from the beginning, it helps you reduce the outstanding principal as well as the tenure from the very first month. If you are staying in a high-rental accomodation and do not have spare money to start the EMI right now, you may prefer to start paying the ‘interest-only’ on the partially disbursed amount which is Pre-EMI.
Who should opt for Pre-EMI?
As mentioned, if you are not comfortable starting to pay off the loan principal right now due to constraint in fund-flow, you could opt for Pre-EMI till you can start paying the EMI. This does not essentially mean that you will have to wait till possession. You can switch in between too.
Who should opt for EMI?
Similarly, if you have spare cash to start the monthly EMI right now, you can start repayment of the loan right away. This way your loan principal repayment starts and your unexpired tenure reduces too.
Can the repayment mode be switched from Pre-EMI to EMI in the mid-term prior to possession?
Yes, there is. We generally advise our clients to not to wait till possession to start the EMI. In a situation where say, you have drawn down 95% of the loan and the final 5% is payable on possession, but the project is delayed by 6 months, which is a common phenomenon in India, you land up paying Pre-EMI (simple interest) on almost the complete loan amount for 6 months, which is actually close to the EMI amount itself. Your acquisition cost shoots up and no repayment of the principal or reduction in the tenure happens! So, switching to EMI mode after drawing down 70-75% is recommended. But not all lenders allow that. Are those who allow, won’t initiate it for you. You will need your adviser to structure this for you.
What is beneficial for the borrower?
Depends on the borrower’s suitability. One must keep the following risks in mind if you opt for Pre-EMI:
(1) Few lenders do not allow you to part-preclose the loan under Pre-EMI stage. They will ask you to pay installments to the builder instead for a few tranches, but won’t let you reduce the loan amount.
(2) Some lenders give you automatic Pre-EMI option without checking with you. This is very risky. In the loan application, there is no provision to opt for it and generally during loan agreement signing either you forget to check or specify or the lender overlooks it in a hurry.
(3) You save no tax benefit by paying interest-only to the lender and some don’t even issue you the interest certificate. If you are paying the EMI from the beginning, you can claim all the interest paid during the under-construction stage in a spread of 5 years, after taking possession. You can not do so for payment of Pre-EMI in under-construction stage.
(4) Upon getting the possession only your repayment starts. So, whatever sum you have paid so far neither reduced your principal, not tenure. If you had opted for a 20 year loan term 5 years ago and paid Pre-EMI for 5 years, then you pay 5+20 years. Some lenders consider this 5 year Pre-EMI term included in the 20 year and amortise your repayment in 15 years, making the EMI amount higher!
(5) Delay in possession bleeds you bad. For example, if the loan amount was 1 crore and 95% of that is drawn, you pay interest only on Rs 95 Lacs for all the months of delay without a single rupee repayment, for which the EMI could be lesser than Rs 1 Lac a month, wherein you pay Rs 95,000/- of Pre-EMI unnecessarily.
Source : http://goo.gl/OaNehL