SBI's FlexiPay suitable for those with secure jobs

Could be risky if borrowers' salary does not keep pace with rising EMI

If you have zeroed in on your dream home, but cannot afford to pay the equated monthly instalments (EMIs) because of your low salary, you can opt for State Bank of India (SBI)’s FlexiPay Home Loan scheme. Provided you are a salaried employee aged between 21 and 45 and the loan amount is a minimum of Rs 20 lakh. The scheme, launched on Monday, allows borrowers to get higher loan amount compared to their loan eligibility under regular home loan schemes. Other conditions like interest rates, loan to value ratio (LTV) and pre-payment conditions remain the same, says Jayanti Lakshmi, chief general manager (real estate, habitat and housing development) at SBI. Borrowers will have the option of paying only interest during the moratorium (pre-EMI) period of three to five years, and thereafter pay moderated EMIs. The EMIs will be stepped-up in subsequent years. Against this, in a regular home loan the EMI remains the same, unless the rate of interest changes.

“A lot of youngsters who need a two-bedroom house now often end up buying a one-bedroom house because of their salary. They later on sell it and buy a bigger home. But, under the Flexi Pay scheme, they can buy a bigger home early in their careers. When you take a loan in the initial period of your career, the burden may seem high. But, the EMI increases as your salary rises,” Lakshmi says.

There were similar products in the past under names such as telescopic loans or step-up loans. These loans are designed for those who are in the early stages of their career and whose incomes will increase. At the time of sanctioning the loan, the bank will fix a rate for an annual increase in the EMI, in line with the increase in salary.

Typically, EMI for all your loans put together cannot exceed 60 -65 per cent of net salary credit to bank. This includes home loan, personal loan, auto loan, credit loan, etc. For higher salary above Rs 1 lakh, this can go up to 70 per cent.

Those in government service or with secure jobs and predictable increases in salary could look at this loan. But, it could be risky for others, says Gaurav Gupta, chief executive officer, Myloancare.in. "In India, especially in metro cities, the ratio of cost of the house property is about six times the annual income, due to costly real estate and, hence, the need for higher EMI.'' But, borrowers have to be doubly wary of rising EMIs in a hardening interest rate scenario. “While the bank will increase the EMI as per the pre-decided annual reset, there will also be additional burden of higher interest rates. If the loan tenure is already, say 30 years or so, then the borrower may not get the option of extending the tenure. So, the EMI could increase even more. The risk is that the customer has reached the maximum eligibility limit at the beginning of the loan,” Gupta adds.

There is a risk of the borrower getting over-burdened by debt if the salary does not increase proportionately, points out Vineet Jain, CEO, Loanstreet.in. “It is tempting for customers to take a risk by borrowing higher amounts. But, with job stability not very high, there is no guarantee that salary increases will happen as planned. That is a risk for both the borrower as well as the lender,” he says.