Standard Chartered Bank recently introduced an interest-only home loan product. Well, no loan gets repaid if you just keep paying the interest. Therefore, in this product, you do not need to repay any principal for a few years. The regular EMI starts on the completion of principal moratorium period.
In this post, let us discuss the pros and cons of such interest-only home loan products.
About Standard Chartered Interest-only Home Loan Product
- Available only for completed residential properties. Not available for under-construction properties.
- Available to both existing and new clients of the bank
- You can transfer existing home loans with other banks to this product.
- Moratorium of 1-3 years on principal repayment. During this period, you must only the interest on the principal outstanding.
- Borrowers can commence full installments or EMI before the end of initial (moratorium) period.
- Loan amount ranging from Rs 35 lacs to Rs 3.5 crores.
- Maximum loan tenure: 30 years for salaried and 25 years for self-employed
How Can Interest-only Payments Help?
Such products can resolve cashflow issues for you. When you buy an under-construction property, you still need to stay in a rented property until you get the possession. Such possession may be a few years away. Until such time, you must pay both the house rent and the home loan EMI. Paying both at the same time may not be easy on your pocket.
Therefore, many banks offer the Pre-EMI option, where you pay just the interest on the disbursed amount (and not on the sanction amount) until the construction is complete. Regular EMI is calculated on the sanctioned amount (and not on the disbursed amount).
|Loan Interest Rate||8%|
|Full EMI (Regular EMI)||41,822|
As you can see, the burden on the pocket during the construction phase is much lower in case of Pre-EMI. As the amount is disbursed, the Pre-EMI will keep going up. And this applies to all interest-only products, irrespective of the nomenclature. You pay the interest only on the disbursed amount.
Even though Standard Chartered Interest-only loan is available only for completed properties, the above argument will apply to this product too. Let us say the bank were to disburse the entire amount on Day 1, under the interest-only option, you will pay Rs 33,333 in monthly payments (Rs 41,822 in case of Full EMI).
Help increase loan eligibility. The banks calculate your loan eligibility based on how much you can pay. The banks have internal threshold on Fixed Obligation to Income Ratio (FOIR). For instance, if your monthly income is Rs 1 lac and the FOIR is 40%, the bank will not sanction a loan your monthly payment (or EMI) exceeds Rs 40,000 per month.
Under a regular loan (Full EMI), this limits the loan amount to Rs 47.82 lacs (8% interest and 20-year tenure). In case of a Pre-EMI option, since the bank just needs to worry about the interest payment, the loan eligibility can be Rs 40,000/ (8%/12) = Rs 60 lacs. Note that while offering a higher loan eligibility, the bank bets that the loan repayment ability of the borrower will increase before full EMI starts. SBI Flexipay Home Loan scheme does exactly this.
Standard Chartered Home Loan Product Is Different
This product allows the interest-only option only for the ready-to-move-in properties. You cannot use the loan to purchase an under-construction property.
However, interest-only home loans are not a novelty. SBI FlexiPay and ICICI Bank Step-up home loan products have been around for a long time and allow principal repayment moratorium even for completed and resale properties
What Are the Problems with Interest-Only Home Loans?
You do not repay loans by just paying the interest. Until the regular (or full EMI) starts, you do not pay any principal. This increases the total amount you pay to close the loan. Note that the cost of loan does not change, only the absolute payout is higher in case of interest only loans (or Pre-EMI loan products).
Let us understand this with the example.
|Loan Features||Full EMI||Pre-EMI or Interest-Only Loans|
|Loan Interest Rate||8%||8%|
|Loan Tenure (Years)||20||20||20||23||25|
|Principal Moratorium Period||–||3||5||3||5|
|Monthly payment during Moratorium period||–||33,333||33,333||33,333||33,333|
|Total Payment (lacs)||100.4||119.8||134.7||127.4||145.5|
You can see that the total payment for loan repayment increases sharply for interest-only loans. In the above illustration, we assume that the entire amount is disbursed on Day 1. This won’t be the case for under-construction properties but can happen for resale/completed properties.
What Should You Do?
If we look just at the numbers, the full EMI option looks like a better choice. However, such questions cannot be answered just through spreadsheet analysis. If you must buy a house AND cannot afford the full-EMI OR want a higher loan eligibility, you can consider interest-only home loan products, including the Standard Chartered Interest-only home loan product.
Additional Reading: Standard Chartered Interest-only Home Loan Facility: Press Release