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Home loans with a difference

Smita Tripathi and Arti Sharma | August 02, 2003 12:49 IST

Nobody is denying that this is the best time to buy a house. Real estate prices have tumbled from their peak in 1997 and interest rates on housing loans are being slashed constantly to new lows. Also, there is the added benefit of saving taxes by taking a home loan.

But some would-be buyers are discouraged from taking a loan because of the fear of the long tenure and the strict regime of paying equated monthly instalments, without fail, month after month.

For this category of buyers, there are a new clutch of schemes launched by Citibank and Standard Chartered.

Citibank's Home Credit and Standard Chartered's HomeSaver schemes are unique home loan schemes that are linked to your bank account.

So how do they work? These accounts work on the simple principle that the less you owe on your mortgage each day, the less interest you pay. This principle is made to work by charging interest on your loan outstanding every day vis-ą-vis charging interest on a monthly or quarterly basis.

In order to avail the benefits of this scheme you open a normal savings account with either bank, which can be used to deposit your income and withdrawals and to conduct all other regular operations. When you deposit your income in this account, the EMI (equal monthly instalment) for the loan you have taken is adjusted from your income.

Whatever balance is left in the account, after deducting the EMI, is deemed to be adjusted against the outstanding principal on your loan, therefore lowering your principal as and when you have money to save and deposit.

In short it offers you the flexibility to reduce your loan tenure and save on interest payments.

StanChart charges interest at the rate of 9.25 per cent on an ordinary home loan and at 9.75 per cent in case of the HomeSaver for a 20-year tenure.

Citibank, on the other hand, charges interest at 13.5 per cent for 15 years, for both the ordinary home loan and the Home Credit. These rates are higher than other bank rates.

For instance, HDFC charges 9.5 per cent for between 11 and 20 years while State Bank of India charges 9.25 per cent for a loan of over 10 years.

However, the biggest advantage of this scheme is that since interest is calculated on your daily balances, you can reduce your interest cost substantially even if your surplus savings are in the account for only a day. For each day that your outstanding balance reduces, you pay less interest for that day.

Therefore, you can save a substantial amount on the interest that you would pay on a standard housing loan. What's more, you can also reduce the period to pay back your loan by almost 50 per cent.

Here is an example of the savings you can make. Supposing you take a loan of Rs 500,000 for 15 years at 13.5 per cent interest under Citibank's Home Credit scheme and also under its ordinary home loan scheme.

Let's assume that your monthly income is Rs 30,000 and your monthly expenses are Rs 10,000. Further, let us assume an annual salary hike of 2 per cent and also an annual expense hike of 2 per cent.

Under the home credit scheme you'll be able to repay your loan in two years and five months and pay a total interest of only Rs 81,357.

On the other hand, under the ordinary scheme, you'll pay interest of Rs 6,68,314 over a period of 15 years. So with Home Credit, you save Rs 5,86,957, not to mention over 10 years of having the EMI dagger hanging over your head.

Loans are available from Rs 500,000 to Rs 50 lakh (Rs 5 million) and upto 80 per cent of the value of the property, provided that the EMI does not exceed 60 per cent of your monthly income. The loan can be used for a ready-built property, a property under construction, a plot or a self-constructed property.

Citibank specifies certain eligibility criteria. For instance, salaried individuals need to have a minimum gross annual income of Rs 100,000, a minimum age of 25 and at least two years of work experience.

StanChart will check the gross monthly salary and match it to your loan requirement and only then sanction the loan. So if you require a Rs 10 lakh (Rs 1 million) loan, you need to have a gross salary of Rs 23,000 per month for the next 15 years.

The Union Bank of India has also recently launched a home loan scheme which has three repayment options -- set up, flip and balloon. Under the set up option, you can increase the EMI amount and accordingly reduce the loan tenure. This is allowed up to three times during the tenure of the loan.

For example, if initially you had a taken a loan for Rs 100,000 for 180 months at 9.75 per cent, the EMI would be Rs 1,059. Now supposing you increase the EMI by 3 per cent after 36 months, the new EMI will be Rs 1,091 and accordingly the remaining period will come down to 136 months.

This scheme is beneficial for the salaried class -- if their salary rises they can increase their EMI.

Under the flip scheme, the borrower can pay a lump sum and has the option of either reducing the tenure period or the EMI amount.

Again, the lumpsum amount can be paid only three times during the tenure of the loan. The balloon scheme is similar to the flip plan, except that you can make a lump sum payment only once during the tenure of the loan.

Flip and balloon are beneficial for self-employed persons. Whenever they have surplus funds, the money can be used to repay the loan without being charged any prepayment penalty.

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