State Bank of India had launched a new home loan scheme a few months back. The scheme offered higher loan eligibility by up to 20%. It has created a lot of interest of home buyers, especially among those buyers who were struggling to purchase their dream house because of lower loan eligibility.
In this post, I will discuss SBI FlexiPay Home Loan Scheme in detail and show how the scheme manages to offer higher loan eligibility.
Salient Features of SBI FlexiPay Home Loan Scheme
- The loan is available only to salaried individuals with at least 2 years of work experience.
- The age of the applicant should be between 21 and 45.
- Your loan eligibility under the scheme is higher by up to 20% as claimed by the bank. We will see how that happens.
- You have the option to select moratorium period of up to 36-60 months. During the moratorium period, you are required to pay only the interest. No principal repayment during the moratorium period.
- It is a floating interest loan. Interest rates and Loan-to-value is same as other home loan schemes
- Longer repayment tenor of up to 30 years.
In fact, apart from applicant eligibility and the presence of moratorium period, everything is same as other home loan schemes. We will see how the presence of moratorium period increases your home loan eligibility.
How is SBI FlexiPay Home Loan Scheme different?
There is only a minor difference. Under this scheme, there is a moratorium period in which you only need to pay the interest. You can think of this as pre-EMI. You have this concept of pre-EMI with other home loan schemes too. However, with other schemes, you have to start paying the full EMI after a few months or as soon as you get possession.
Under SBI FlexiPay, the moratorium is a fixed tenor. You have to select it while applying for loan. The moratorium period can be between 36 to 60 months.
When the moratorium period ends, you must pay full EMI.
How do you get higher loan eligibility?
No rocket science. It is higher because you don’t have to pay principal during the moratorium period.
Let’s consider an example.
Let’s assume the bank follows the policy of FOIR (Fixed Obligations to Income ratio) of 40% i.e. if your monthly income is Rs 1 lac, the bank won’t offer you a loan whose EMI is more than Rs 40,000. Of course, the bank will look at many other parameters before sanctioning loan. However, let’s ignore those for the time being.
For loan tenor of 20 years and interest rate of 10%, loan of Rs 41.44 lacs will have an EMI of Rs 40,000. So, that’s your eligibility under a regular home loan scheme.
Under the SBI FlexiPay scheme, you have to pay only interest during the moratorium period. Hence, under this scheme, your loan eligibility will be an amount whose interest does not exceed Rs 40,000 per month. For a loan of Rs 48 lacs, you will pay interest of Rs 40,000 per month. So, Rs 48 lacs will be your eligibility under SBI FlexiPay home loan scheme.
That is a neat increase of 16% in loan eligibility over a regular home loan scheme.
You will end up more interest in SBI FlexiPay scheme
That is a given. You are paying only the interest amount for the initial years. That is excess interest you are paying.
Let’s consider an illustration.
You take a loan of Rs 40 lacs under a regular home loan scheme. Rate of interest is 10% p.a. and the loan tenor is 20 years. EMI for such loan will be Rs 38,600.
Contrast this with the following two cases under SBI FlexiPay scheme.
Case 1: Loan of Rs 40 lacs. Tenor of 20 years (5 years moratorium + 15 years Full EMI). For the first five years, you will pay Rs 33,333 per month. From the start of 6th year till the end of 20th year, you will pay Rs 42,984 per month.
Case 2: Loan of Rs 40 lacs. Tenor of 25 years (5 years moratorium + 20 years Full EMI). For the first five years, you will pay Rs 33,333 per month. From the start of 6th year till the end of 25th year, you will pay Rs 38,600 per month.
You can see you will end up paying excess interest under SBI FlexiPay scheme.
With loans, the power of compounding works in the reverse direction. The longer you are in the loan, the more you pay in terms of interest. Please note the cost of loan remains the same at 10%. It is just that the loan structure makes you more absolute interest.
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How does SBI look at it?
You might feel why SBI is indulging in such largesse. Why will they lend more to you? Well, it is a business decision to get more customers. And they have adequate safety.
The bank will still create mortgage over your house. In case you can’t repay, they will auction the house and get back their amount.
Also, notice the applicant eligibility. SBI is offering loan only to salaried persons between 21 and 45 years of age. There is a minimum work experience requirement of 2 years. The bank believes that the salary of borrower with such profile will grow over a period of time and the borrower will be able to afford full EMI when the moratorium period ends.
SBI FlexiPay Home Loan scheme is useful to those who need (or want) higher loan eligibility. For instance, if your loan eligibility is Rs 40 lacs (under a regular scheme) and you want loan of Rs 30 lacs, there is no need to think about SBI FlexiPay. Opt for a regular home loan scheme.
By opting for SBI FlexiPay home loan scheme, you will unnecessarily pay higher loan interest. Why would you want to do that?
SBI FlexiPay can be useful if your loan requirement is higher than your loan eligibility.
Exercise caution. Do not borrow more than you can afford. Do not borrow more just because you can borrow more. There is a big assumption that the bank is making while offering your loan SBI FlexiPay scheme. The assumption is that your income will grow over time and you will be able to afford full EMI when the moratorium period ends. Nobody knows better than you if this assumption holds true.
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