Loyalty to lender can reduce home loan burden

A borrower can save up to 5% in Axis Bank’s new product; but if prepaying, don’t lower the EMI

Axis Bank’ s new home loan product—Shubh Aarambh— can help borrowers save up to five percent of the total payment, including principal and interest, considering the interest rate is fixed at 8.35 percent for the entire tenure of 20 years.

“We wanted to target the affordable housing segment and that’s why the cap on the loan amount. The property price does not matter,” says Jagdeep Mallareddy, head–retail lending, Axis Bank. Mallareddy says the benefit is given at the end of each milestone year.

The good part is that if interest rates were to go up after, say the eighth year, the borrower can shift without any penalties or fees charged for the benefits availed.

At present, the benefits look something like this. For a ~30- lakh loan at the existing interest rate of 8.35 per cent, a customer gets to save ~3.09 lakh if he takes a loan for 20 years. The benefits come by the waiver of four equated monthly instalments (EMIs) each in the fourth, eighth and twelfth years.

These waivers would bring down the effective rate of loan to 7.67 per cent, again if the rate stays fixed. This would be cheaper than the home loan rates being offered by all the top lenders for loans up to ~30 lakh, such as State Bank of India, ICICI Bank and HDFC, who offer home loans at 8.35 per cent. But, since the rate is floating like all other banks, there is definitely the danger of interest rates rising over a period of 20 years. In that case, the EMIs would go up and so will the overall interest burden.

To avail the benefit, the customer needs to stay with the bank for the entire tenure. In a 20-year loan, it hardly makes sense to shift after the twelfth year. All lenders structure loans in such a manner that they collect interest from you in the initial years and principal later. In the first year, for example, 80 per cent of the payment made goes towards interest. In the twelfth year, the proportion of principal and interest in the EMI is almost on a par. From the thirteenth year onwards, the principal payment starts to increase.

“A home loan is a longtenured product. Some lenders pass the interest rate cut benefits faster than others. Do evaluate how prompt the lender is in cutting interest rates compared to others,” says Rishi Mehra, CEO of Wishfin.com.

But what happens if the customer prepays the loan and brings down the EMI? According to Mallareddy, the waiver is based on the EMI you are paying around the milestone year. If you lower the EMI by making a prepayment, the bank will waive the four instalments based on the new EMI that you have close to the milestone year. When the interest rate starts to rise, lenders give customers an option to either increase the EMI amount or the tenure. If you chose to raise the EMI, you could benefit more in this product.

At present, the bank’s advertised interest rate is at 8.35 per cent for the loan. The rates do vary depending on the customer profile but it is marginal — all loans in this product would be given at 8.358.45 per cent. “Typically, banks set their interest rate based on applicant’s credit score, profile, property and other risk assessment parameters. For the same loan amount and tenure, the interest rates can differ,” says Naveen Kukreja, CEO and co-founder, Paisabazaar.com.