Yesterday Axis Bank launched quite a innovative Home Loan scheme (As projected by Media). Today morning when i checked my mailbox, i was surprised to see lot of mails from my reader’s seeking my opinion about this path breaking and industry first “Home Loan Scheme”.
After going through the Press Release issued by Axis Bank, it looked quite compelling scheme on paper and anyone can go ahead with the same without giving any second thought. Only visible catch is that all the EMI payments should be paid on time.
Somewhere in my mind, i was not convinced about the scheme becoz there are “No Free Lunches in this World” after all 12 EMI’s is a very big amount to be waived off. From Layman perspective 1 year waiver on 15 year loan is equivalent to 6.66% on total Payment to bank so instead of 100 Rs, you will pay 93.34 Rs. Some financial cruncher will read it as direct discount of 6.66% in interest rate so if interest is 11% then effective interest is 4.34% but this is not the way to look at it.
To find answer of my queries, i visited Axis Bank as a dummy customer, Though home loan executive was not well versed with the scheme details (Knowingly or Unknowingly). Her only sales pitch was “Waiver of last 12 EMI’s”. After that i visited few more branches & checked with my sources to know more micro details about this scheme.
Here come, some finer details of the scheme
1. The biggest catch is that this scheme is applicable only for loans with tenure of 20 years or more. Indirectly, if u r age is more than 38 years then u r not eligible for this scheme becoz in a normal scenario while lending a Home Loan, Bank assume that you will work only till 58 years and in any case your Last EMI should not extend beyond 58 years of age. Some banks may relax this limit upto 60 years but then also for availing loan under this scheme ur age shud be less than 40 years
2. Next catch is that tenure of ur Home Loan shud be 15 years, what it means is that if ur loan tenure or if u pre-close ur loan before 15 years then you are not eligible for any EMI waiver under this scheme. As i mentioned by me in my previous blogs that average tenure of any home loan is just 8 years i.e. half the Home Loans are closed before 8 years & 90% loans are closed before 15 years therefore approx 90% of customers who will avail loan under this scheme will not be eligible for EMI Waiver until unless Borrower will keep his home loan intentionally active till 15 years to get the benefit.
3. Under this scheme, Interest Rates offered are slightly higher than Market rate. For under 25 lac loan interest rate is 10.75% whereas SBI is offering loan @ 10.25% and HDFC is offering @ 10.5% in this segment.
For loans upto 75 Lacs, Interest under Happy Ending Home Loan scheme is 11% whereas SBI is cheapest @ 10.4% and HDFC @ 10.75%. Above 75 lac, interest rate is 11.25% and again cheapest is SBI at 10.4%
4. Loan Processing Fees is very high @ 1% of Loan Amount: When all the lenders are moving to lower Processing fees regime, Axis bank is charging 1% as Processing Fees. SBI charge approx 1k and HDFC charge 10k + ST but under Happy Ending Home Loan scheme, if u take loan of 70 lacs then u will be paying Processing fees of 70k. This is huge amount.
5. Borrowers will not have flexibility to change their EMI’s or Loan tenure e.g. if after 3-4 years your salary increases & u wish to increase your EMI then you cannot do so. Any change in EMI and tenure by bank will not impact your eligibility of EMI Waiver. Just to add any impact on EMI or tenure due to part payment by borrower will not impact your eligibility provided your Loan Tenure does not go below 15 years therefore you cannot prepay the amount, which reduce your loan tenure below 15 years.
6. Loan cannot be converted from Floating to Fixed during Loan Tenure.
7. No change is allowed in EMI date i.e. 5th of every month. Any change will lead to disqualification from EMI waiver.
8. Of-course, you cannot change ur lender i.e. switch your loan from Axis Bank to any other bank.
9. Most important catch is that waiver is not on the EMI fixed at Loan disbursement but EMI waiver is on lowest of following 3 amounts
a) Last 12 EMIs principal outstanding excluding interest component.
b) If your loan tenure is 15 year 6 months then you will get benefit of principal outstanding of the 6 months EMIs therefore to get complete benefit of 12 Months EMI waiver, your loan tenure should be 16 years (12 months over 15 years).
c) Sum total of 12 EMIs as calculated at the time of disbursement. Obviously this will never be lowest of 3
Conclusion: Through “Happy Ending” Home Loan scheme, Axis Bank has killed following 3 Birds with 1 stone by Dangling a carrot of 12 EMI waiver in front of Borrower
1. Borrower’s Loyalty: In today’s competitive scenario its very difficult to buy Customer’s Loyalty & is most prized gift. With 12 EMI waiver in mind, borrowers in this scheme will rarely think of switching home loan.
2. Probability of EMI Default is Low: Scheme is defunct if EMI is not paid on time, it will bring discipline in EMI payment thus chances of default are very low
3. Limited Pre-Payment Possibility: RBI has removed charges on pre-payment, which encouraged many borrowers to pre-pay loan. With 15 years clause as pre-condition for EMI waiver, the possibility of reducing loan tenure below 15 years through part payment of loan will be minimal. Secondly, if through pre-payment EMI is reduced instead of loan then the benefit of scheme will be diluted.
This scheme will be beneficial only for young borrowers, who are planning to borrow High Loan amount with 15-20 years loan tenure in mind. High Loan amount for luxury properties at young age will be perfect USP for this Loan Scheme.
Disclaimer: Views expressed by me is my personal interpretation of facts and Loan Scheme and is no way binding on any individual. All reader’s are advised to conduct independent & thorough check on Happy Ending Loan Scheme of Axis Bank. Reader’s discretion is required before taking any decisions. I am not responsible for any loss or implications arising out of decision taken by any reader after reading my post. This post is for general information purpose. Kindly read complete disclaimer.
Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.