If you see your income rising periodically, a scheme that allows pre-payment is always better
LIC Housing Finance Ltd (LICHFL) has introduced a home loan scheme in which borrowers will be eligible for waivers for a set of equated monthly instalments (EMI) during their loan tenure. Called the ‘2020 Home Loan Offer’ this scheme will be available for ready-to-move-in houses.
Recently, Axis Bank too offered a similar scheme. But the waiver of EMIs does not mean that it is a free lunch. Here are the important aspects of the scheme.
Up to six EMIs will be waived during the loan tenure. Two EMIs each at the end of fifth, 10th and 15th years will be waived for those opting for the scheme, on the condition that the borrower is regular in making repayments and makes no pre-payment for the first five years. The scheme will be applicable only to ready-to-move-in houses/flats and where the occupation certificate is obtained. The maximum tenure of this loan is 30 years and maximum loan amount is Rs 5 crore. This offer is available for a short period, i.e., till February 29 and the disbursement has to take place before March 15.
Unlike LICHFL’s scheme, Axis’ Fast Forward home loan offer can be can be used to purchase an under-construction, a resale or ready-move-in property. To be eligible, the tenure should be at least 20 years and minimum loan amount should be Rs 30 lakh.
After paying EMIs for 10 years straight, your subsequent six months’ EMIs are waived off. Upon completion of 15 years, another six months’ EMIs are waived off.
Axis Bank’s Shubh Aarambh Home Loan, on the other hand, is a similar scheme, but with a maximum amount of Rs 30 lakh, presumably targeting affordable housing borrowers. This scheme waives off your four EMIs at the end of fourth, eighth and 12th years, respectively. The home loan can also be used to purchase an under-construction, a resale or ready-move-in property. The minimum home loan tenure is 20 years at the time of loan disbursement and the maximum home loan amount is Rs 30 lakh. A total of 12 EMIs will be waived off by each of the two Axis home loan schemes.
The rate of interest for Axis Bank home loan schemes are 8.55 per cent to 9.20 per cent per annum in floating rate schemes and 12 per cent in fixed rate schemes, for salaried individuals. For self-employed borrowers the interest rates are higher i.e. 8.65 per cent to 9.40 per cent. The rate of interest for LICHF scheme is 8.10 per cent onwards depending on the borrowers risk profile, credit score, etc.
Home loan schemes that offer EMI waiver are long-term ones. Typically, they are suited for people with modest incomes and those who may not be able to pre-pay their loans.
It rewards loyalty. Those who stick around throughout the loan tenure get rewards by way of EMI waivers.
The devil lies in details of these schemes. These schemes make it difficult to prepay the loans. For the Axis schemes, although you can partly pre-pay your home loans, your loan tenure should not fall before your first waiver (fourth year in the Shubh Arambh option and 10th year in the Fast Forward scheme) becomes due. For instance, you shouldn’t pre-pay a large amount that reduces your loan tenure to three years and 11 months for Shubh Arambh and nine years 11 months for the Fast Forward scheme. LICHFL’s schemes are stricter; you cannot even partly pre-pay till your first waiver (i.e., five years) is due.
Shalini Gupta, Co-founder and Chief strategy officer of MyLoanCare.in says, “The EMI waiver loans reduce a borrower’s flexibility to transfer the outstanding amount to another bank that may offer a lower interest rate during the loan tenure.” Gupta sees this as the bank’s strategy to retain the home loan borrower for a longer tenure.
Sukanya Kumar, Founder & Director of home loan advisory firm, RetailLending.com says, “The EMI waiver offered until eight years of loan tenure will be beneficial for borrowers. Any EMI waiver after eight years may not be beneficial to most borrowers.” This is because most borrowers prefer to prepay home loans from savings, annual bonus, etc. by eight years.
As tempting as EMI waivers may sound, there are two main reasons why these schemes aren’t mean for everyone.
Axis’ schemes, specifically, come with very long minimum tenures, of 20 years. Says Hemant Beniwal, Director at Ark Primary Advisors, “People in their early 40s or beyond may not find the schemes attractive as the loan tenures may well extend till their early retirement years. Typically, most banks too desist from giving long-term loans to those in this age group.”
Second, these loans also discourage pre-payments. However, prudent financial planning calls for erasing your debt at every opportunity possible. Besides, when you pre-pay loans, your credit score also tends to improve. In fact, the Reserve Bank of India also encourages pre-payment of loans and has removed all pre-payment penalties that banks used to charge earlier.“Home loan borrowers should always opt for the best loan offer in terms of interest rate, processing fee, etc. They should opt for the EMI waiver home loan scheme only if it works out to be the cheapest option for them,” says Ratan Chaudhary, Head of Home Loans, Paisabazaar.com. Millennial borrowers may, however, may find such schemes beneficial as they can extend their horizon to 15-20 years. But if you see your income rising periodically, a scheme that allows pre-payment is always better.
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