The catch: The scheme may be attractive but is not free of catch. Standard Chartered Bank charges a higher rate for the Home Saver loan than a normal housing loan.

The rate difference, on a case-to-case basis, could even be half or one percentage point. HSBC, on the other hand, offers the scheme only for floating, and not fixed, rate loans.

With interest rates bottoming out, it may be better to lock into a fixed-rate loan. An interest rate hike could negate the positives of the scheme. Citibank offers the scheme on both fixed and floating rates and does not follow differential pricing for the product.

Suitability: This is suitable for those not keen on having a large liability and who frequently have short-term surpluses. It would also suit those who are not avid financial planners. But if you are the type who meticulously allocates surpluses into other investment channels — such as small savings schemes, bonds or equity — regularly and have a long-term investment strategy, then the scheme may not be of much value. The return on long-term investments would be higher than your savings on interest.

Flexible EMIs

You are in your mid-twenties, just started a career and do not have much cash to spare. But still you want to invest in a good house. By opting for a flexible EMI scheme, your dream house could well become a reality.

How it works: Under the scheme, you can pay lower EMI during the initial period of the loan, and it is gradually stepped up to keep pace with your salary increments.

You will have to pay a minimum EMI to at least cover interest payment on the loan. For instance, for a Rs 1-lakh loan for 120 months at 8 per cent, the interest component would be a minimum of Rs 625 per month. Your EMI cannot be lower than the interest due at any point of time.

You can increase the EMI by a certain percentage at regular intervals. The level of increase and the frequency at which your EMI can be increased are considered on a case-to-case basis and also differs from bank to bank. HDFC, LIC Housing, Corporation Bank and ICICI Bank offer this scheme.

Some banks also give a step down facility, whereby you can pay high instalments initially and then lower it progressively. This is suitable for people in their late 40s whose income might reduce post-retirement.

Advantage: The scheme allows you to stretch a bit further than your means. It allows you to borrow more than what you would have been eligible under the normal scheme. Usually the loan amount that you are eligible for is fixed depending on your repayment capacity. Your EMI can be a maximum of 40-60 per cent of your income. As the EMI is lower during the initial years, your loan eligibility automatically increases.

Suitability: The step-up plan is suitable for youngsters who expect regular jumps in their income as they progress in the career.

The catch: Lower EMI actually means you are postponing the repayment of your principal and you continue to pay interest. So, you actually pay a higher interest than you would have otherwise paid, as your principal outstanding is higher for a longer period.

You might get a tax benefit on the higher interest paid. But when the interest itself can be saved, the savings in the tax on the interest (which could be a maximum of 30 per cent of the interest paid) does not sound logical.

It might be beneficial if you have been allocating the difference in the flexible EMI and the regular EMI towards, say, a tax-free bond where you earn a higher return and still benefit from the tax break on your housing loan.

The scheme can be taken with both floating and fixed rates. Some banks, however, offer the scheme only on floating rates. At this juncture, however, it is safer to lock in to a fixed rate, as interest rates appear to have bottomed out. Even a one-percentage-point increase in interest rates could have an impact on your financials if you opt for a floating rate.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page