Housing loans: Bundled products

Who doesn't like the idea of a new home? A few years ago a house may not have been affordable for many of us. Not anymore. Now-a-days home loans are just a phone call away.

But what is still gruelling is the running around you may have to do while you prepare to step into your new home. Shopping for new furniture, modular kitchens and other durables can be great fun.

But who likes to shop for life cover and property insurance? It's hardly fun. Not only that, for most people dealing with financial products is not easy. Here come housing finance institutions (HFIs) to your rescue.

Thanks to the rising competition in the housing mortgage market, HFIs are offering bundled products to make their products unique in order to attract customers.

There are a plethora of products which are not just plain vanilla home loans. Accident insurance, life cover and property insurance are common. Some HFIs even offer unemployment insurance.

In other words, in case you lose your job, the bank will give you a grace period of three months when you do not have to pay the installments.

Then there are schemes offering householder's cover which essentially is a insurance cover for jewellery, domestic appliances, etc. Some other products also offer property-linked cover which provides insurance against the destruction of the house itself.

While ING Bank offers term cover for principal outstanding and also free property insurance for the first year, ICICI Bank offers free property insurance for the entire term of the loan.

Besides, there are loan products which are linked to your savings or current account which help you cut your overall interest cost. The bank from which you are seeking the loan will open a current account in your name just like a regular bank account.

This account is attached to your home-loan account. The moment you deposit money in your current account, the principle outstanding on your home loan account will be reduced by a similar amount.

For example, if your loan amount is Rs 1 lakh and interest payable is 7.5 per cent, the interest payable every month works out to around Rs 625 (plus a fraction of the principal component).

Now, the moment you deposit any amount in your current account, the principal repayable reduces by that extent till the time the money remains in the current account.

This means that if you deposit Rs 10,000 in the current account, the principle outstanding falls to Rs 90,000 for the number of days the money stays in the bank.

In effect, the interest payable decreases and the principle pre-paid increases resulting in faster repayment of loans. Though the borrower continues to pay the same amount as installment, the savings come in the form of reduction in tenure of the loan without any pre-payment charge.

At present Standard Chartered Bank (Home Saver) and Citibank (Home Credit) offer current account attached loans. But this, of course, comes at a cost. Typically, current account-attached loans are around 50 basis points higher than the regular home loans.

What about the cost associated with bundled products? The best part is that some HFIs offer these added benefits, particularly life and property insurance, as freebies to attract borrowers.

Normally, HFIs provide insurance cover for the first year after which customers are required to renew their policy to keep it going. Some of the specilised products work out to be a bit on the expensive side.

But then, they may either offer your savings in some other form. At worst, it may be a small cost for the convenience factor.

Structured products

HDFC BANK: Step-up payments Under this scheme, EMIs are increased in stages. For example, for a 15-year loan, the repayment schedule, divided into three tranche, would give a step up in the EMI at the end of the third and seventh year.

The EMIs for the first seven years constitute a large part of interest and a nominal sum of the principal portion.

For the balance eight years, the EMIs are stepped up to recover the outstanding principal and interest for the remaining term of the loan. This product can be used to maximise the tax benefit as it defers the payment of principal.

Flexible loan installment plan This product is for customers whose repayment capacity is likely to alter during the term of the loan. The loan is structured in such a way that the EMl is higher during the initial years and subsequently decreases in the latter part, proportionate to the reduced income of the customer.

For example, if a customer has 10 years of service left and his wife has 15 years to retire then a 15-year loan can be structured such that a higher EMI (serviced out of both the incomes) is paid for first 10 years and a lower EMI (serviced out of only wife's income) is paid for the next five years.

Acceleration of EMI

Under this facility, the customer has an option to increase EMIs every year in proportion to the increase in his income.

If a customer avails of a loan with a repayment period of 15 years and increases his EMIs every year by, say, 10 per cent, he would repay the loan in approximately eight years.

ABN AMRO BANK: Variable interest costs

ABN Amro Bank introduced its home loans at variable interest costs (this is different from the variable loans currently available). Under the scheme of Home Loan Super Saver, the rate of interest is fixed at 6 per cent for the first year and 6.5 per cent for the second year.

From the third year onwards, the rate will be floating and pegged at 50 basis points higher than the prevailing PLR of the bank in the third year. The bank's PLR currently stands at 7.25 per cent.