Benefit only for low home loan slabs

There are good benefits for borrowers in the range of 8.35-8.4%. Otherwise, the backending of discounts makes the offers unattractive

Festival season and discounts go hand-in-hand. And, discounts are packaged very attractively to spur you into buying the latest television, fridge or other goods, whether you need it or not. 

Many have started understanding the financial engineering that goes behind such discount offers. For example: Zero per cent schemes. All of us now know these schemes simply pass on the discount from the manufacturer/seller to the lender, rather than to you. And the interest rate charged is 16-18 per cent a year. 

Recently, a friend called me to decipher the latest home loan offers by two prominent banks, ICICI Bank (one per cent cash back) and Axis Bank (12 equated monthly instalments back or EMIs). 

A little analysis would indicate that while there is no catch if you are getting the home loan at, 8.35 per cent - 8.40 per cent, these offers make little sense if your starting home loan interest rate is higher than 8.4 per cent a year. 

Look at both offers. For a 20-year home loan amount of Rs 50 lakh, Axis Bank’s Fast Forward Home Loans will cost 8.65 per cent a year. On regular payment, 12 EMIs will be waived off, six months’ EMIs on completion of 10 years, and another six months EMI on completion of 15 years (source: www.axisbank.com). 

Harsh Roongta

The EMI waiver product will help you pay off the loan in 18 years and four months (instead of 20 years), and the good news — the effective interest rate will drop to 8.11 per cent. But, the drop in rates happen only after the loan has run for at least 15 years. Till then, you are paying a much higher than normal home loan interest rate. 

Similarly, in the case of ICICI Bank Home Loans, the declared rate is 8.7 per cent (Rs 50 lakh loan) and you will receive a one per cent cash back on every EMI paid for the entire loan tenure. The cash back amount will be accumulated for the first three years (36 months) and credited at the end of this period. Post this, cash back will be credited yearly till the loan closure (source: www.icicibank.com). This will reduce the cost to 8.57 per cent, higher than what you can get today.

In both cases, if the loan amount is Rs 30 lakh, the initial interest rate itself is a competitive rate of 8.35-8.40 per cent and if the borrower does not prepay, the offers are will benefit them. By the way, most borrowers tend to prepay the loan within the first 10 years, either because they have surplus funds or they have to sell the house or for other reasons. 

For loans over Rs 30 lakh, banks are effectively back-ending the discounts. If you prepay your loan, you are foregoing the discount. This is a backdoor way but legal one of charging a prepayment penalty is, otherwise not allowed under the regulations. So, it makes sense to go for these offers if the initial interest rate is 8.35-8.4 per cent. Else, stay away. 

(The author is a Sebi-registered fee-only investment advisor)