Young salaried employees are target customers for all the banks. Therefore, you can expect them to come with schemes to lure such prospects to their fold. The core idea behind such products is to offer such customers principal moratorium for a few years (since they may not be able to afford the full EMI). The loan amount is amortized (or recovered) over the remaining tenure of the loan. The banks bet on the increase in salary during the moratorium so that it is easier to afford the full EMI.

I have already discussed two such schemes from State Bank of India (SBI FlexiPay Scheme) and ICICI Bank (ICICI Bank Step up Home Loan). In this post, I will discuss a similar offering from Punjab National Bank (PNB-Gen-Next Housing Finance Scheme for the public) and see how it is different from the offerings from ICICI Bank and SBI.

## PNB Gen-Next Housing Finance Loan for the Public

### What Is the Eligibility?

- Available to salaried class borrowers such as IT professionals, PSBs, PSUs, Govt. Employees
- Minimum work experience of 3 years
- Loan can be taken for purchase of ready-to-move in house/flats, for construction of house and for purchase of under-construction property from an approved builder
- Applicant age must not exceed 40 years
- In case of multiple borrowers (where income from other borrowers is also used to arrive at loan eligibility), at least 1 borrower must be up to 40 years of age while others can be up to 45 years of age. Co-borrower must also be a salaried employee
- In cases where co-borrowers’ income is not used for arriving at loan eligibility (co-borrower because of co-owner of the property), the age of such co-borrowers will not be considered
- Minimum post-tax salary (after accounting for tax and PF deductions) shall be Rs 35,000
- Minimum loan amount is Rs. 20 lacs
- There is no cap on maximum loan amount. However, there will be a cap due to repayment capacity and Loan-to-Value (LTV) of the house
- Margin for Housing loan up to 75 lacs: 20%. For loans above Rs 75 lacs, margin shall be 25%. You need to arrange this money from own pocket
- You need to take term insurance for the loan amount. Typically, most banks insist on such insurance. As discussed, in an earlier post, purchase such term insurance on your own, rather than purchasing through the bank. You can have the policy assigned in favour of the bank

### How Much Can I Get and What Is the Loan Tenure?

In this case, the loan eligibility is arrived at using a different method as compared to schemes from SBI and ICICI Bank. **The bank first arrives at your loan amount as per regular home loan calculation method. You are eligible for 1.25 times the above calculated number. ****Loan tenure is flat 30 years. **I did not see any cap linked to borrower age. This is a bit strange since if a person takes a loan at the age of 40, the loan repayment shall go on till the age of 70 years. However, most home loan borrowers try to square off their home loans much before the contracted schedule. I believe PNB is betting on this aspect. In any case, the bank has your house as the security. Therefore, you should be worried more than the bank.

(By the way, for ICICI Bank Step-up loan, the loan tenure was capped at 20 years.)

As per eligibility calculator available on PNB website, if your net income is Rs 50,000, the EMI you can afford is Rs 25,000 (assuming you are not paying any other EMIs).

- At 10% interest rate for 30 years, your loan eligibility under regular home loan scheme will be Rs 28.48 lacs.
**Under PNB Gen-Next Housing Finance Scheme, your loan eligibility will be Rs 28.48 lacs X 1.25 = Rs. 35.60 lacs**

Under the methods used for ICICI Step-up loan and SBI Flexi-pay scheme, your loan eligibility would have been only Rs 30 lacs (Rs 25,000/ (10%/12)). This is assuming SBI and ICICI also used 50% of net income as EMI threshold. Therefore, you can get a higher loan amount under this PNB schemes as compared to SBI and ICICI Bank. Another point to note is that you may not get such long tenure loans with aforementioned schemes from SBI and ICICI Bank.

### Moratorium Reduces Loan Eligibility

**If you avail moratorium, the loan eligibility goes down. **Though nothing to this effect was mentioned on the website, when I ran the calculator available for this loan product on PNB website, this could be easily inferred. When I introduced principal moratorium of 3 years, loan eligibility went down from Rs 35.6 lacs to Rs 34.95 lacs. i.e., the bank considered tenure of only 27 years (30-3) to arrive at loan eligibility amount. Moratorium of 5 years reduced the eligibility to Rs 34.4 lacs.

### How does the repayment schedule work?

Let’s first talk about the principal moratorium period.

- In case of under-construction flat from an approved private builder: 36 months + Remaining period of date of possession. This is subject to a maximum of 5 years.
- For other cases: 3 years

About repayment,

- During moratorium period: Only interest to be paid.
- For the next 10 years: EMI on the sanctioned limit for 360 months
- For the remaining loan tenure: EMI that is needed to amortize loan over the remaining period of the loan

### Illustration

Continuing with the above example, let’s assume you took the loan for Rs 34.9 lacs (for 3 years moratorium on principal repayment) under the PNB scheme. Let’s say the interest rate remains constant at 10% p.a. during the home loan tenure. Principal moratorium is for 3 years.

- For the first three years, you will have to pay only interest i.e. Rs 29,126 per month. Now this is quite bizarre. If Rs 25,000 per month was the threshold, how can the borrower pay (or afford) Rs 29,674 per month? This is also as per calculator available on Punjab National Bank website.
- For the next 10 years, you will pay an EMI of Rs 30,672 per month.
- For the remaining 17 years, you will pay an EMI of Rs 32,458 per month.

## Conclusion

**To be honest, this loan structure makes little sense to me.** The loan products from SBI and ICICI made sense since the EMIs for the initial few years were in line with your affordability. However, when the bank thinks that the borrower can afford an EMI of only Rs 25,000, it makes little sense to offer a loan whose EMI is Rs 29,126. You can always argue that you can go for a loan of Rs 30 lacs under PNB scheme (rather than going for full loan eligibility). However, in that case, the higher loan eligibility (as compared to SBI and ICICI Bank loans) is no use.