How good are festive home loan schemes?

How good are festive home loan schemes?

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Credit growth for banks has slowed down due to low demand for credit from corporate as well as the priority sectors. Loans for low-cost houses, a priority sector, have been similarly affected. In the quarter ending June 2017, growth of housing loans was 2.81%, the lowest since at least June 2014. This credit slowdown is pushing banks to launch new schemes to attract consumers. Every year, in the Durga Puja-Diwali festival season, banks launch deals on home loans to attract more business. How good are the deals this year?

Ajay Mishra, vice president and business head—secured loans,, said that banks generally come out with offers on loans during the festival season, mostly in the form of processing fee waivers. “This time, the schemes—especially from ICICI Bank Ltd and and Axis Bank Ltd—aim not just to acquire customers but also to make them stay with the bank for a long period. That is the idea behind keeping the minimum tenure at 15 years,” he said.

While this is an important factor, there are more things to look at in these schemes.

ICICI Bank 1% EMI cashback 

Here, you receive a cashback of 1% on every equated monthly instalment (EMI) paid over the loan tenure, up to 30 years. However, to avail this scheme, you will have to sign-up for a tenure of at least 15 years. In addition, there is a processing fee of 0.5% of the loan amount and you must have an ICICI Bank account to avail this loan.

The cashback on EMI starts only after payment of 36 EMIs, and thereafter for every 12 EMIs paid. So you will have to stick with this loan for at least 3 years to get the cashback benefit. However, if you decide to foreclose the loan in any subsequent year, you will get this benefit for all the EMIs paid. If you decide to foreclose the loan in the 52nd month, for instance, you would have already received cashback for 36 months and then subsequent 12 months, and you will also get the cashback for the four more EMIs you would have paid. The loan is available on fixed and floating interest rates and there are no foreclosure charges.

The cashback amount will be either credited to your ICICI Bank account or adjusted against the principal outstanding against your loan. You would benefit more if the cashback is utilised to reduce the principal. For instance, for a Rs25 lakh loan for a tenure of 15 years, cashback of Rs43,919 will get credited in your account. However, if you opt for principal readjustment, the benefit will be Rs80,291.

Axis Bank’s ‘Shubh Aarambh’ 

Axis Bank’s Shubh Aarambh home loan promises to waive 12 EMIs over the loan tenure. The minimum tenure at the time of disbursement should be 20 years and you cannot prepay before 4 years. Under the scheme, the maximum loan amount is Rs30 lakh. This loan scheme is offered only on a floating rate.

This means, you need to stay with the bank, and with the loan, for at least 48 months to get the EMI waiver benefit. To avail the loan, you have to pay the processing fee, which is up to 1% of the loan amount, with a minimum amount of Rs10,000. If your repayment record is not consistent—such as an EMI becoming overdue for more than 90 days, or if there are three instances of late payments (more than 30 days)— the EMIs will not be waived. Read more about this product here:

If you meet all the parameters, you will get a staggered waiver of 12 EMIs—four EMIs to be waived at the end of the 4th, 8th and 12th year. While waiving off the EMIs, both the principal and the interest amounts will be waived off.

Here, for a Rs30 lakh home loan for 20 years, at an interest rate of 8.35% per annum, the waiver on principal would be Rs1.23 lakh and the interest waived would be Rs1.86 lakh. Thus, the total benefit amount would be about Rs3 lakh.

Should you take these loans?

The big catch in these schemes is their long tenure to get the benefits. Moreover, both these schemes have processing fees, while some of the other banks are offering home loans at a zero processing fee.

So which option is better? And just how can the longer loan tenure with these schemes impact you? Naveen Chandani, chief business development officer, said that the faster a loan is repaid the better it is. “If you already have—or are planning to have—a long-tenure loan, then these schemes make sense. Paying over a shorter tenure is always the cheapest option,” he said.

Financial planners insist that these schemes should not become a deciding factor while taking home loans. Melvin Joseph, founder, Finvin Financial Planners said, “A person should go for a home loan only when she is prepared for it, when she has the money for down payment, and can confirm that she can manage to pay the EMIs for a long time without affecting the normal standard of living.”

Moreover, it also helps to have a home loan from a bank with whom you have a longstanding relationship. “The bank will know your income and payment habits and will be happy to lend to you, especially if you have a good credit score. I see no reason why that bank will not give you a loan at the most competitive rate. This relationship will improve your bargaining power with the bank,” he said.

A difference of just 20-30 basis points in interest rate should not sway your decision. “I think that the difference is only to attract a customer. It doesn’t mean that the bank offering a lower rate will maintain it for long. It is also important to check the track record of a bank in terms of transparency in adjusting loan rates with changing interest rates. Unless the difference is over 0.5%, I don’t think it is a good idea to go out of way to another bank,” he said. One basis point is one-hundredth of a percentage point.

How do these two deals compare with each other? For a loan of Rs30 lakh for a 20-year tenure at 8.35% interest rate, with the Axis Bank EMI waiver with 1% processing fee, you will end up paying Rs59.01 lakh. With the ICICI Bank 1% EMI cashback deal, with a processing fee of 0.5%, you end up paying Rs60.39 lakh. With a plain vanilla SBI home loan with 0% processing fee, you would pay back Rs61.80 lakh.

So the festive schemes may appear to be attractive to you. But be sure you want to stay in the product for the long term. Also, check for processing fee and interest rates and do the math before you buy.