Tagged: SBI FlexiPay

ATM :: Home loans: Facing a cash crunch? Here’s what borrowers should do

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

ATM

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

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