I read about an interesting product in The Hindu Business Line about “Design your EMI” home loan product from Godrej Housing Finance website. The said article was in fact a press release.
What Is the Claim?
In the product, you can choose your own repayment schedule. I copy a few statements from a senior official from Godrej Housing Finance.
“Suppose, EMI for a ₹50 lakh loan is about ₹40,000. So, the customer can start with small EMIs — ₹10,000 a month in the first year; ₹20,000 a month in the second year…The EMI can go up slowly”
“There can be another scenario where the customer feels that since some of his expenses have come down in the pandemic, he wants to increase the EMI to, say, ₹60,000 a month. Later on when the expenses go back to normal, the EMIs can get normalised to ₹40,000 a month”
While EMIs help borrowers plan their monthly budgets and the loan gradually gets repaid, there is no reason why the loan should be repaid only by way of equated monthly installments (EMIs). The borrowers should get some flexibility.
If the borrower faces cashflow issues for a few months, he should be allowed to make lower payments.
On the other hand, if there is a surplus, he should be allowed to increase monthly payments. This is not a big problem because you can always use surplus to make explicit prepayment. This will achieve the same purpose.
What Do We Not Know Yet?
I could not find many details about the product on the web or on Godrej Housing Finance website. We do not yet know how customizable these EMIs are. Do the borrowers have to specify the EMI rates upfront? Or is there an option to change monthly EMIs along the way? This will likely be allowed. Is there a limitation on how many times you can change the EMI?
By the way, we have seen similar variants that provide loan repayment flexibility. We have seen step-up loans (you pay less initially and more later) and step down loans (you pay more initially and less later). However, in those cases, the repayment schedule is fixed upfront. You cannot modify the repayment structure later.
With Godrej “Design your EMI” product, this may be possible. You may be allowed to adjust monthly payments along the way.
We Must Not Forget Loan Mathematics
You must remember, the monthly installments must still pay off the loan (within the loan tenure). So, if you pay less than the regular EMI in a few months, you must pay more than the regular EMI in the other months. No two ways about this.
Moreover, the interest must be paid in full every month or else the loan account risks becoming an NPA. Moreover, if the interest is not paid in full, the principal outstanding will rise, which is awkward. Thus, the interest component will put a floor on your monthly payments.
During Covid-19 pandemic in 2020, the RBI explicitly allowed moratorium on loan repayments. And the loan outstanding amounts rose during the pandemic period due to non-payment of interest. The moratorium ensured that the non-payment of interest did not result in loan account becoming an NPA.
I excerpted a statement above. For a Rs 50 lac loan, you could somehow pay Rs 10,000 for a few months. I am not sure how that will work.
Assuming the loan is for 20 years and the interest rate is 8%, the EMI in the first month for the Rs 50 lacs loan shall be Rs 41,822. Just the interest component alone is ~Rs 33,300. I do not see how you can choose an EMI which is less than the interest component for the month. Therefore, Rs 10,000 EMI for Rs 50 lacs loan (as mentioned in the example above) may not be possible.
Yes, for an under-construction property where the loan disbursement is linked to construction milestones, you may be disbursed a lower amount than the sanctioned amount. And in such a case, you can get away by paying just the interest component on the disbursed amount. Happens in pre-EMI loans. Let us say, out of the sanctioned limit of Rs 50 lacs, only Rs 10 lacs has been disbursed yet. In that case, you can pay Rs 10,000 per month and keep the loan standard. Not for a Rs 50 lac disbursed amount.
Godrej “Design your EMI” seems like a fine product. We need to wait to understand the level of flexibility the product offers.