Almost everyone plans to purchase a house sooner or later. For those who want to purchase their house early in their professional career, affordability of the home loan can be a serious issue. Your salary grows over a period of time. Your non-discretionary expenses such as rent, groceries, utility bills, school fees for kids etc. may account for a good portion of your salary. Paying home loan EMI along with rent can be a strain on your cash flows. Moreover, your entire financial planning can go haywire if you suddenly find your “Dream House”. You wouldn’t mind stretching your budget a bit. However, banks may not oblige. Your loan eligibility does not go up just because you want to purchase your dream house. For such cases, banks have come out with products that let you enjoy higher home loan eligibility (we will see how).
In one of the earlier posts, we had discussed about SBI Flexi Pay loan scheme. In this post, we will talk about ICICI Bank Step-up Home Loan product. Let’s see how this product works and if it makes sense for you to opt for home loan under this scheme.
ICICI Bank Step-Up Home Loan: Salient Features and Eligibility
- Enhanced loan eligibility by up to 20%
- Maximum Loan amount up to Rs 3 crore
- Available for both constructed/resale and under-construction properties
- You should be working with select corporates as identified by ICICI Bank
- Clearly, the product is not available to self-employed
- You should not be more than 40 years old
- Your minimum monthly income should be Rs 20,000
- Maximum Loan Tenure of 20 years
- If you have an existing home loan (unpaid), you are not eligible for step-up repayment facility
How Does Repayment Work?
Repayment Schedule is divided into two terms:
- Initial or Primary Term (for 3-5 years): Only interest is payable.
- Secondary or Balance Term: Both interest and principal are payable.
Clearly, since you have to pay only the interest during the first 3-5 years, your loan eligibility will be higher.
Why Does This Happen?
Let’s say your monthly income is Rs 50,000 and the bank is comfortable with a FIOR (Fixed Income to Obligations Ratio) of, say, 40%. That means bank will any lend any amount where the EMI (or the monthly commitment) doesn’t exceed Rs 20,000. You want to go for a 20 year loan and the prevailing home loan interest rate is 10%. If you go for a full EMI loan, your loan eligibility will be Rs 20.72 lacs. However, if you have to pay only interest, the loan eligibility is Rs 24 lacs. i.e., Rs 20,000/(10%/12). Therefore, the loan eligibility is 15.8% higher. Increase in loan eligibility will vary based on numbers used but you get the idea.
Caveat: You Will See Sudden Jump in EMI Once Initial Term of 3-5 Years Is Over
Continuing with the same example, let’s assume you go for a loan of Rs 24 lacs under ICICI Bank Step-up loan scheme. The entire amount is disbursed upfront. Let’s assume you pay Rs 20,000 per month (only the interest) for the first 5 years. After 5 years, full EMI will start. The entire principal has to be repaid in the next 15 years. For the first 5 years out of 20 year tenure, you were paying only the interest. Let’s assume interest remains constant during the entire loan tenure. The EMI will jump to Rs 25,790. That is a jump of almost 29%. You need to be able to afford the hike in EMI. I have not even considered the risk of hike in interest rate. Both you and the bank are betting on the increase in your income over the next 3-5 years so that you can afford the full EMI when it kicks in. You are in serious trouble if the bet goes wrong. Bank wouldn’t worry much. They will sell your house to recover.
How about Pre-Payment of This Loan?
Pre-payment can only be made once you are in the Secondary term. No prepayment is possible during the initial term. This could be justified on the grounds that if you do not have enough money to pay full EMI during the primary term, how can you think about pre-payment? However, for me, it is a limitation. For all you know, you could find windfall from somewhere, a gift, inheritance or a lucrative overseas assignment. In absence of this limitation, you could have considered pre-paying a portion of your home loan. From the perspective of the bank, they have locked you in for at least 3-5 years.
You Will Pay More Interest during the Loan Term
Let’s consider the above example.
| ICICI Bank (Regular) Home Loan | ICICI Bank Step-up Home Loan | |
| Principal | 2,400,000 | |
| Interest | 10% | |
| Tenure | 20 years | |
| Primary Term | 5 years | |
| Secondary Term | 15 years | |
| EMI during Primary Term | 23,161 | 20,000 |
| EMI during Secondary Term | 23,161 | 25,791 |
| Total Payments made | 5,558,525 | 5,842,294 |
| Total Interest paid | 3,158,525 | 3,442,294 |
| Excess Interest Paid | 283,769 | |
By opting for step-up loan, you will pay Rs 2.83 lacs more during the loan tenure. Do note the cost of loan (before tax benefits) stays the same at 10% in both cases. The difference is only in the absolute interest paid.
Are Such Products Useful to You?
There is clear benefit if you want to increase your loan eligibility. Continuing with the earlier example, if you need Rs 24 lacs of loan to complete purchase of your existing property, you will be better off with this type of loan. It may be difficult to manage full EMI along with rent if you are planning to buy an under-construction property. Such loan products can offer relief.
However, do not get fixated with this product. Quite possible other banks are offering home loan at a lower interest rate that will automatically increase your loan eligibility. For instance, at loan interest rate of 9%, your loan eligibility would move up to Rs 22 lacs.
Do note pre-EMI concept (you pay interest on the disbursed amount) is applicable in regular home loan products too. Just that you do not get higher loan eligibility under regular products. And pre-EMI feature is available only for under-construction properties. ICICI Bank Step-up loan can even be taken for constructed or resale properties.
From the perspective of the bank, it is a win-win situation. It is new business. Moreover, you cannot run away anywhere (take balance transfer to another bank) for the next 3-5 years. You cannot even prepay the loan, if you want. For banks, getting the money back is not a big problem. Your house is mortgaged to the bank.
Things You Need to Keep in Mind
- On ICICI Bank website, it is mentioned that the home loan interest rate for standard home loan product and the ICICI Bank Step-up loan product will be same. I have not verified this independently with any ICICI Bank Branch.
- For purchase of completed properties/resale, the maximum primary period is 3 years.
- For under-construction properties, primary period can be as long as 5 years. I could not figure out from the bank website if the primary period gets over once the construction of house is complete. Or if there is any other condition that can cut short the primary period.
- You cannot switch an existing home loan to step-up repayment facility. That is, you cannot take a balance transfer to this product.
Do not borrow more just because you can borrow more. If you can take sufficient loan under a regular home loan product, there is no need to go for this product.
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