In an earlier post, I had talked about ICICI Bank Step-up Home Loan, where the applicants could get higher loan eligibility than regular home loans due to moratorium on principal repayment for a few years. However, the limitation with Step-up loan was that the maximum age was capped at 40 years, the loan tenure was capped at 20 years. Moreover, the loan was only available to salaried employees from select corporates. What if your age is greater than 40 or you are self-employed? Clearly, you will not be eligible for ICICI Bank Step-up Home Loan. What do you do then? Is there any other product from the same bank that you can use to get a higher loan eligibility? Well, ICICI Bank has another home loan product, ICICI Bank Extraa Home Loan, that might just suit your requirement. In this post, let’s look at this product in greater detail and if you should go for such a product.
Please understand the intent of this article is not to highlight products from a particular bank. The intent is to show the different product structures available in the home loan segment. I am sure many other banks offer similar products with minor tweaks. I leave it to you to research such products across banks and find out the best one for you.
Salient Features of ICICI Bank Extraa Home Loans
- Available to buyers in Greater Mumbai, National Capital Region (NCR), Bengaluru and Surat (as per bank website)
- Available to both salaried and self-employed
- Maximum Loan Tenure: 30 years
- Maximum age at the time of taking loan: 48 years
- Age limit for the borrower is 67 years. i.e., if you take this loan at the age of 45, your loan tenor can be only up to 22 years.
- Maximum Loan size: Rs 75 lacs
- For loans to self-employed, seasonality of income is also considered.
Unlike ICICI Bank Step-up home loan, where you get moratorium on principal repayment to enhance your loan eligibility, ICICI Bank Extraa Home Loan extends your loan tenure (up to the age of 67) to increase your home loan eligibility. Do note that the loan-to-value (LTV) ratio does not change. Therefore, in any case, you wouldn’t get loan for more than 80% of the value of the property. I must concede the information on the website is not very clear. I have relied on certain illustrations given on the website and information from other sources to make an assessment about this product.
How Does ICICI Bank Extraa Home Loan Increase Your Loan Eligibility?
By increasing the loan tenure. Your home loan EMI depends on the loan amount, interest rate and the loan tenure. By increasing the tenure, you can lower your monthly EMI outgo. Since banks look at Fixed Income to Obligation ratio (FOIR) to arrive at your loan eligibility, a lower EMI can increase your eligibility for a higher loan amount.
Let’s consider an example. Your monthly take-home income is Rs 100,000. Let’s assume banks are comfortable with an FOIR of 40% i.e. an EMI of Rs 40,000.
- At interest rate of 10%, loan tenure of 20 years and a EMI of Rs 40,000, your loan eligibility will be Rs 44.45 lacs.
- For the same loan amount (Rs 44.45 lacs) and interest rate, if the loan tenure was 30 years, your EMI would have been Rs 35,771. Since you can afford an EMI of up to Rs 40,000, the loan eligibility can go up to Rs 49.71 lacs for 30 year loan.
You can see loan eligibility has gone up from Rs 44.45 lacs to Rs 49.71 lacs by increasing the loan tenure. An increase in loan eligibility by almost 12%. Do note that the extent of increase will vary based on the numbers chosen.
How Will You Repay Loan during Retirement?
Typically, loan tenure is decided such that the loan will be repaid by the time you turn 60. This is because paying EMIs during retirement can be difficult. However, under ICICI Bank Extraa Home Loan, you can repay till the age of 67. How will you do that? Well, that’s your problem. The bank is not much concerned.
The bank buys the protection for excess home loan amount that you take. You have to pay the premium. This product comes bundled with Mortgage Guarantee from Indian Mortgage Guarantee Commission (IGMC). Any enhancement in loan or repayment period is covered under mortgage guarantee scheme. You have to bear the cost of this mortgage guarantee commission. This cost is payable upfront. Depending upon your profile and nature of employment, you will have to shell out 1.5%-2.5% of the home loan amount. Since only the excess amount is backed by guarantee, the premium is a much higher percentage of excess loan taken. It is not very clear to me how this premium is actually calculated. Note that this protection is only available to the bank (and not to you). If you do not repay the home loan, the bank can auction your property. For instance, mortgage guarantee does not mean the excess loan amount will be waived off in case of default. The bank will still recover the entire loan amount from you. This mortgage guarantee premium will add to the cost of your loan. Lower the loan tenure, greater the impact. Another way to look at it is that your loan amount is effectively reduced by the premium (you pay EMI on the higher loan amount).
Based on the illustrations provided on the home loan page, it seems that the mortgage guarantee premium will be higher for self-employed than the salaried employees.
I will discuss an illustration given on the loan page on the bank website. Amit is a 47 year old man. He needs a loan of Rs 44 lacs and can afford a monthly EMI of Rs 45,000. If the interest rate is 10% and loan tenure is 13 years, he will get a loan of Rs 39.2 lacs. So, he is short of the required amount. Under Extraa Home loan, with loan tenure extended to 18 (till the age of 65), he can get a loan of Rs 45.5 lacs. Serves his purpose. He will have to pay Mortgage Guarantee premium of Rs 70,000 (guess this is before taxes). Guarantee premium of Rs 70,000 (before GST) for an additional loan of Rs 6.5 lacs. With this, effective cost of loan (before accounting for tax benefits) goes up from 10% to 10.3% per annum.
There is absolutely no reason why you should go for this loan (or a similar loan product) unless you have run out of other options. Mortgage guarantee premium is an additional upfront cost that provides you no benefit except that it helps you in getting the loan. It adds to overall cost of the loan. As for any kind of debt, prudence is extremely critical. Do not borrow what you cannot repay. By committing to EMI payments for many years into your retirement, you are taking a big risk. You have to be doubly sure that you can make those payments or else you will lose your house during retirement. To be honest, I can’t fathom how can any one be sure about it. If, at 47, you cannot afford a slightly higher EMI, how can you be so sure that you will pay the full EMIs during retirement? Your circumstances may make you feel that this product is a godsend. However, do not ignore the cost and risks involved. For the bank, it is a marketing and customer acquisition strategy. For you, it is much more. Committing to EMI payments during retirement involves great risk. Be aware of such risk before signing up for this loan product.