State Bank of India has recently come out with a home loan product, SBI FlexiPay Home Loan scheme. As with all the SBI home loan products, it has created a lot of buzz among the prospective borrowers. In this post, I will discuss the important features of this scheme and what makes it different from other home loan schemes.
Salient Features of SBI FlexiPay Home Loan Scheme
- The loan is only available to salaried professionals with at least 2 years of work experience.
- The applicant should be aged between 21 and 45.
- The bank claims that your home loan eligibility will be up to 1.2 times higher as compared to other home loan schemes.
- You have the option of selecting the moratorium period of up to 36-60 months. During the moratorium period, you will have to pay only the interest. You need not make any principal repayment. Technically, during the moratorium period, you have to pay Pre-EMI.
- It is a floating interest rate loan. So, can’t be compared with teaser home loan that SBI launched post Lehman crisis.
- Longer repayment of 25-30 years is available.
- Interest rates, Loan-to-value (LTV) etc is same as other home loan schemes.
- It appears you cannot make principal repayment during the moratorium period even if you want to.
How does the SBI FlexiPay Scheme work? During the moratorium period, you pay only the interest amount. Since there is no principal repayment during such period, outstanding principal does not go down during the moratorium period. When the moratorium period ends, you have to pay full EMI.
How does your Loan Eligibility increase under this scheme? It increases because you don’t have to pay the principal amount in the initial years (moratorium period). This automatically increases the loan eligibility. Let’s consider an illustration:
Suppose your monthly income is Rs 1 lac. You have no loan currently. You have applied for a home loan. The bank, let’s suppose is comfortable with FOIR (Fixed income to obligations ratio) of 40%. Hence, the bank won’t offer you a loan which makes you pay an EMI of more than Rs 40,000 per month. Assuming you are looking at loan tenor of 20 years and the current home loan interest rate is 10% p.a., the maximum loan (under a regular home loan scheme) that you can get is Rs. 40-41 lacs. However, under regular schemes, you have to pay principal and interest together.
Under SBI FlexiPay home loan scheme, you merely need to pay the interest during the initial years (moratorium period). Hence, the bank may be comfortable offering you the loan amount whose interest amount does not exceed Rs 40,000 per month. Therefore, the bank can go up to Rs 48 lacs (Rs 40,000/(10%/12)). There you have your 20% extra loan eligibility. Under a regular home loan scheme, you could have got a maximum loan of Rs 40-41 lacs. Under FlexiPay home loan scheme, the loan amount can go up to Rs 48 lacs.
The bank is betting on the fact that your salary will increase during the moratorium period and you will be able to afford when full EMI come into force. This is essentially the reason why the loan offer is only for salaried professionals aged between 21 and 45 with minimum two years of experience. Banks have much better clarity of income potential with salaried employees.
Who can find these SBI FlexiPay Home Loan Scheme useful? You have shortlisted a house to purchase for Rs 60 lacs. You have Rs 12 lacs of own funds. You need a loan of Rs 48 lacs to finance the remaining amount. Continuing with the example in the previous section, you are eligible for a loan of only Rs 40 lacs under a regular scheme. Under FlexiPay home loan scheme, it can go up to Rs 48 lacs. So, you can purchase a house under FlexiPay scheme but not under home loan scheme.
That’s the only difference between regular home loan schemes and this scheme. There is no other benefit. In fact, do not opt for this home loan scheme for any other reason. If the loan amount under regular scheme is enough for you, there is no need to take loan under this scheme.
What every Borrower needs to be aware of? As pointed out in earlier posts, the power of compounding works in the reverse direction in case of loans. Hence, the longer you take to repay, the more interest (in absolute terms) you will have to pay. Let’s consider an example:
Suppose you have taken a loan of Rs 50 lacs for 20 years under a regular home loan scheme. Let’s assume the interest rate stays constant during the term of the loan at 10% p.a. You will pay total interest of Rs 65.8 lacs. The EMI will be Rs 48,251.
If you borrow under FlexiPay home loan scheme with total tenor of 20 years and moratorium of 5 years, you will total interest of Rs 71.7 lacs. For the first five years, you will pay Rs 41,667 per month. From 6th year till the end of 20th year, you will have to pay Rs 53,730 per month. You can notice the sudden jump at the end of moratorium period.
Alternatively, if you borrow for 25 years (with moratorium of 5 years), total interest amount goes to Rs 90.8 lacs. You pay Rs 41,667 per month for the first five years. For the next 20 years, you pay Rs 48,251 per month.
| Regular Scheme | FlexiPay Scheme | ||
| Principal | 5,000,000 | ||
| Interest | 10% | ||
| Total Tenor (Years) | 20 | 20 | 25 |
| Moratorium (Years) | NA | 5 | 5 |
| Total Interest | 6,580,260 | 7,171,446 | 9,080,260 |
Do note the cost of loan in all the cases is still 10% p.a. The total interest amount is changing because the repayment structure is different in the 3 cases. This shows, unless you need higher loan eligibility, you should not opt for FlexiPay Home Loan from SBI. Another concern is that you may end up borrowing more than you can afford to repay. The entire premise behind such a scheme is that over a period of time, your salary will increase. In case that does not happen, you will find yourself in big trouble when the full EMI payment begins.
Conclusion
In my opinion, there is nothing wrong with the scheme. This scheme may actually offer a possibility to some of the borrowers to purchase their dream house, which they wouldn’t have been able to purchase under a regular home loan scheme. However, there is no need to opt for SBI FlexiPay home loan scheme unless you are looking for higher loan eligibility. As with any kind of debt, you need to make sure that you do not borrow beyond your means. There is only a moratorium on principal repayment for a few years. You still need to repay the loan.
When it comes to home loans, bank’s interests are always safeguarded. If you can’t repay, they can always auction your house to get back their funds. They can afford to take some risk. You can’t afford to be reckless. The underlying assumption behind SBI FlexiPay scheme (and higher loan eligibility) is that your salary will grow during the moratorium period and you will be able to afford when the moratorium period ends. You have to doubly sure that will happen. Are you? Nobody can answer this question better than you can.
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