We regularly discuss unique and innovative loan products on this website. A few weeks back, we had discussed Step Down Home Loans launched by a prominent financial institution. In this post, we discuss a unique home loan product from Axis Bank. Axis Bank has recently launched a new product “QuikPay Home Loan”. Let’s find out how this loan product works.
What Is Unique about Axis QuikPay Home Loan?
Under this loan product, there is no concept of EMI or Equated monthly payments. This is because you do not pay the same amount every month. Strange, isn’t it? With Axis QuikPay, you repay the same amount of principal every month. By the way, this is in addition to the monthly interest payments.
For instance, if you take a loan of Rs 50 lacs, you repay Rs 20,833 (50 lacs divided by 240 months) of principal every month. Interest for the month is calculated as usual by multiplying the outstanding at the end of previous month by the monthly rate of interest. These two add up to your monthly payment under the loan. The principal is constant, but the monthly interest keeps changing. Therefore, the monthly payments are not constant.
Let’s take an example. You take a loan of Rs 50 lacs for 20 years. Rate of interest is 9% p.a. Here is how your repayment schedule will look like. I assume that the rate of interest remains the same and you don’t make any prepayments.
|Month||O/S at the beginning of the month||Interest paid||Principal Repaid||Monthly Payment||O/s at the end of the month|
As you can see, the principal repaid remains constant during the loan tenure. For this reason, your monthly payments are not equal either. You can also notice that the monthly loan payment goes down every month.
Comparison: Regular Home Loan Repayment
Under a regular home loan EMI, you pay equal monthly instalments. First, monthly interest is calculated on the outstanding loan amount. Anything left goes towards principal repayment. For more on how regular home loan EMIs work, refer to this post. I post the repayment schedule for the same loan (Rs 50 lacs, 20 years, 9% p.a.). As you can see, only a small portion of your EMI goes towards principal repayment initially. The principal portion of the EMI increases over the loan tenure.
|Month||O/S at the beginning of the month||EMI||Interest paid||Principal Repaid||O/s at the end of the month|
Do You Really Save Interest?
In terms of absolute interest cost, you save a lot of money in QuikPay home loan. Since you are paying a higher principal amount (and higher monthly payments) from the very beginning, the absolute interest paid will be lower under the QuikPay Loan scheme. However, the cost of the loan remains the same in both the cases. i.e., in the example discussed above, the cost of loan is 9%.
Under a regular home loan scheme, you pay total interest of Rs 57.96 lacs. Under QuikPay home loan, you pay total interest of Rs 45.18 lacs. That is a neat saving of Rs 12.77 lacs. However, do note the cost of loan is the same in both the cases. You could have achieved a similar effect by prepaying your loan on a regular basis (as we would discuss later).
Should You Opt for Such Products?
Axis QuikPay loan is a unique product. It is a fine product and I do not have issues with the product structure per se. However, it makes little sense to pay a higher rate of interest for this product. Going by Axis Bank website, the rate for Axis QuikPay home loan is about 15 to 20 basis points (0.15% to 0.2%) higher than regular home loan. As a borrower, you should never sign up for such a deal. Till such time you have to pay a higher rate of interest, stay away from Axis QuikPay Home Loan. There is no point paying a higher rate of interest. Axis Bank, in its press release, cleverly tried to show that you pay less even if the rate of interest is higher. This is the kind of gibberish that banks throw at us all the time and we fall for it. Avoid making such mistakes.
Most of us tend to prepay our home loans anyways and there is no prepayment penalty either. Thus, most home loan borrower pay much lesser absolute interest anyways. Remember, even with prepayments, the cost of the loan remains the same. In fact, if you could the prepay the differential principal amount every month and re-amortize the loan every month, you will replicate the Axis QuikPay structure on your own. Remember, this is at no additional interest cost. If you don’t trust me, here is the proof. You can match the numbers in the illustration for QuikPay home loan above.
|Month||O/S at the beginning of the month||Monthly Payment (re-amortized every month)||Interest Paid||Principal Repaid||Principal prepayment every month||O/s at the end of the month||Net Monthly Payment||Difference between QuikPay and this method|
Clearly, it can be an operational hassle and the bank can limit the number of prepayments in the year. However, you don’t have do this every month. You can prepay every quarter or an annual basis and relax.
Source / Additional Read
- Axis Bank Press Release on launch of QuikPay Loans
- QuikPay Home Loan page on Axis Bank website
- Axis QuikPay Home Loan FAQs