Propmart brings you latest real estate news from across the country. These news items are from popular news dailies and are related to real estate sector and its allied industries.

Real Estate News

Goto: Previous News || Next News

Home loans: Some add ons

The Times of India
 

The era of plain vanilla home loan products is over. The products now come attached with frills and add ons. Whether these frills and add ons make economic sense for the borrower is another question and would depend on case to case. Let us look at some of these add ons being offered to borrowers - some at an explicit cost and some at an inbuilt implicit cost.

Step-up repayment

One such feature is step-up repayment. The customer can avail of a higher amount of loan and pay lower EMIs in the initial years. Subsequently, the repayment is accelerated proportionately with the assumed increase in his income. The objective of this scheme is to provide the customer with a repayment schedule which is linked to his expected growth in income. It also helps a customer get a larger amount of loan. The EMIs will be increased in stages. For example, for a 20-year loan, the repayment schedule divided into four stages, would give a step-up in the EMIs at the end of every fourth year. The EMIs for the first four years constitute a large part of interest and a nominal sum of the principal portion. For the balance 16 years, the EMIs are stepped up to recover the outstanding principal and interest for the remaining term of the loan. Considering the tax benefits on the interest paid on the housing loans, this option can be used to maximise tax benefits. Under this mode, the payment of principal amount is deferred to later years.

Acceleration of EMIs

Another add on feature can be the acceleration of EMIs. Under this facility, a borrower has an option to increase the EMIs every year in proportion to the increase in his income. In case a customer avails of a loan with repayment period of 20 years and increases his EMIs every year by say 10 percent, he can shorten the effective tenure of his loan period to less than 20 years. In this case, the borrower repays the loan faster and saves on interest for the remaining term. Further, he also retains liquidity, as he need not make lump-sum payments, thus releasing the funds for alternate investments.

Balloon payment

Yet another variant is the balloon payment. Balloon payment is an enhancement tool, which helps in increasing the loan eligibility of the customer without increasing the EMIs. The borrower needs to assign securities like National Savings Certificates, LIC policies, Government bonds etc. in favour of the bank/HFC. The present value of the maturity amount of assigned securities is combined with the loan amount to arrive at the enhanced loan eligibility. In this case, the EMI is calculated on the net loan amount i.e. total loan less the present value of the maturity value of the securities offered by the borrower.

Flexible loan instalment plan

Another add on feature is the flexible loan instalment plan. In this case, the loan product offers a customised solution to suit the needs of customers whose repayment capacity is likely to alter during the term of the loan. The loan is structured in such a way that the EMI is higher during the initial years and subsequently decreases in the latter part, proportionate to the reduced income of the customer.

For example, let us suppose a husband and wife jointly takes a loan of Rs 30 Lakhs for 20 years. The husband has 15 years of service left and wife has 20 years of service left. In this case, the 20 year loan can be structured such that a higher EMI is paid in the first 15 years (as these can be serviced out of both the incomes), and a lower EMI is paid over the next five years (as that will be serviced out of only the wife's income).

» Click here for source «