home loan: how the “interest-only home loan” works; should you opt for this?
The home loan amount that borrowers can get under this scheme ranges from Rs 35 lakh to Rs 3.5 crore. The maximum duration of the mortgage that can be contracted by an employee is 30 years while for an independent borrower it is 25 years. In Bangalore, interest only home loan is offered only to salaried borrowers.
Now, before logging into the bank’s website to apply for this loan, note that there is a catch. According to the bank’s website, “Interest Only Period (applicable for ‘Interest Only Home Loan’) means a period of 12, 24 or 36 months chosen by the borrower and mentioned in the ease/sanction letter. and in the loan agreement during which period Only interest is payable on the loan amount.” Once the principal repayment holiday is completed, you will need to start paying the regular amount of the EMI which will include the repayment amount of the main.
Who can benefit from this ‘interest-only home loan’?
The bank intends to help borrowers who wish to acquire a property at current low prices but who are cash-strapped and unable to make full EMI payment in the first few years. A lower monthly repayment in the first few years will translate into cash savings for these borrowers and, therefore, it will improve their affordability. More cash on hand can also be used for home improvement, renovations, personal needs and more.
“It provides an alternative for our customers who wish to take advantage of prevailing terms and reduce their EMI charge for the initial term of their loan,” said Jinesh Shah, Head – Mortgages and Personal Loans Against Property, Standard Chartered Bank, India .
Many people can expect increased income later on or have a good amount of funds tied up in investments, which should be unlocked in the coming years and would like to take advantage of a good deal currently offered on the purchase of a property. For them, a home loan like this will help them acquire a property at a lower monthly cost i.e. lower EMI.
Should you opt for an “interest-only home loan”?
There is nothing new in this loan in terms of concept as similar flexibility already exists in the form of overdrawn home loans where you just have to pay the interest part and repay the principal as per your convenience. You can get such home loan overdraft called ‘SBI – Maxgain’ Home Loans from SBI where your main obligation is to pay interest only. Many other lenders also offer such an overdraft facility for their home loans.
Compared to an overdrawn home loan, the “interest-only home loan” only allows the payment of interest for a limited period of time. Also, unlike an overdrawn home loan, the interest-only borrower on the home loan is not allowed to withdraw funds as required.
However, you should keep in mind that short home loans usually carry a higher interest rate compared to a regular term loan. For example, SBI charges a 0.35% higher interest rate on its “Maxgain” overdrawn home loan, compared to what it would charge on a regular term loan for a salaried borrower. Thus, it is likely that the interest rate offered on the “interest-only home loan” is higher than the corresponding term loan.
“Standard Chartered Bank offers a similar rate for term loans / OD loans. Our existing interest rates are quite competitive and in line with current market rates, IOHL (Interest Only Home Loan) starts at 6.99%” , says Shah. Although the bank claims to offer a similar interest rate on IOHL, however, it has not shared the details of the comparative interest rate, so borrowers should check this while availing the loan.
Also, the interest-free period you get on the “interest-only home loan” is only an extension of the term of your home loan. So if you take an initial payment term of 3 years with interest only and want a subsequent repayment term of 15 years, your final term will increase to 18 years. A longer term means that a higher amount of total interest will be paid for the loan.
Let’s understand this with an example. The first option you have is to opt for a Rs 40 lakh home loan for a term of 15 years at an interest rate of 7% and the second option is to have an interest period of only 3 years with an interest rate of 7.5% and a total term of 18 years. By opting for the second option, you will end up paying additional interest of Rs 11.10 lakh compared to the first. Even when the interest rate is similar, you will end up paying Rs 8.4 lakh in additional interest for a 3-year interest-only period.
It is always advisable to keep the repayment term as short as possible to keep interest charges low. Unless there is a very compelling offer on the purchase of your property, opting for such a loan will mean that you will lose the interest payment. It makes sense that you do a net benefit analysis before going ahead with such a loan. However, if you have found a very attractive offer where the advantages outweigh the increased cost, you can consider having such a loan.