SBI FlexiPay Home Loan is a new Home Loan product from SBI. SBI is the country’s largest lender. Obviously, i was expecting a lot of buzz around SBI FlexiPay Home Loan. I also shared in my post, why borrowers prefer SBI Home Loan. As usual, my friends from personal finance space jumped the guns to declare it is as the best product around. I will not get into the nitty gritty of SBI FlexiPay Home Loan. I hope all potential borrowers must have gone through the same. It is always important to analyze a product from end user perspective rather being a seller/marketer. The objective of this blog is to give right perspective so that you take the right decision. All financial decisions should be backed by financial logic.
The USP of the SBI FlexiPay Home Loan is 20% more Home Loan eligibility. In short, if under normal home loan your home loan eligibility is Rs 100 then under SBI FlexiPay Home Loan it can be up to Rs 120. As a borrower, you need to calculate at what cost you are getting this additional eligibility. This product is only for salaried individuals with min 2 years experience therefore, there are lot assumptions being made under SBI FlexiPay Home Loan. I would have highly appreciated if SBI would have stated all such assumptions in the brochure. Don’t worry, i will share the same for the benefit of the readers. Thirdly, some of the analysts are comparing it with most hated Teaser loans launched in 2008. SBI FlexiPay Home Loan is not a teaser loan but somewhat similar to that. I will discuss it later in detail. Lastly, this product is old wine in new bottle. It is similar to step up loans. HDFC Ltd and few other HFC’s already have a similar product.
SBI FlexiPay Home Loan – How it Works?
It’s a simple math. The borrower will not pay principal amount during the moratorium period. A moratorium period is a period during the loan term when the borrower will be exempted to pay principal. In other words, it is waiting period. It is technically Pre-EMI period. The borrower has the option to select moratorium period from 36 to 60 months. In short, the borrower has the option to pay only interest on loan amount for 3-5 years. Therefore, from a financial perspective if the borrower is buying a property of 35L. He is availing home loan of 28L and selected moratorium period of say 48 months i.e. 4 years. After 4 years, the principal outstanding will remain same i.e. 28L. Assuming, he will pay EMI of roughly 25k per month then 12L to be paid during 4 years will be only interest component.
Now you must be wondering, how home loan eligibility is increased. It’s a trick. EMI consists of principal + interest. The total EMI outflow should not exceed 50% of net take home salary. Considering the example mentioned above. Assuming my net take home salary of 50k. If i opt for normal Home Loan product then my EMI of 25k will be break up of 5k towards principal repayment and 20k towards interest. Now under SBI FlexiPay Home Loan, the principal component will be Zero and Interest is 25k then by default Home Loan eligibility will increase by 20%. The home loan eligibility will be calculated considering EMI of Rs 31,250 i.e. principal component as Rs 6250 and interest as Rs 25k. Whereas in actual the principal component will be zero because of moratorium period. The principal repayment will be pushed 3 to 5 years ahead with certain assumptions on salary and income part of the salaried employee. The calculations under SBI FlexiPay Home Loan are more complex but i tried to explain with a simple example.
SBI FlexiPay Home Loan – Why you should Avoid
Increase the Cost of the Property:
As i keep highlighting that real estate sector is going through a bad phase. The returns are either stagnant or negative. Under this scenario, interest outflow of home loan further increases the cost of the property. Therefore, the net cost of the property increase. Under SBI FlexiPay Home Loan, as you will pay only interest during the moratorium period. Therefore compared to normal home loan, interest outflow will be much higher in SBI FlexiPay Home Loan.
In the example, mentioned above you will pay 12L interest that implies a cost of the property at the start of Full EMI will be 35L + 12L i.e. 47L. In other words, property cost increased by 33% compared to normal home loan. The interest outflow may increase with an increase in interest rates. After recent RBI policy review, i am of the opinion that we are at the bottom of the interest rate cycle. The only hope of further rate cut depends on the implementation of Marginal Cost of Funds based Lending Rate.
Teaser Home Loan:
Though SBI FlexiPay Home Loan is technically not a teaser home loan but from a financial perspective, it is teaser loan. Under teaser home loan, the rate of interest was low for a fixed period. When the home loan shifted from fixed to floating, the revision of interest rate increased EMI of a borrower. Unfortunately, the interest rate was on an upward slope. A borrower found difficult to pay the increased EMI’s. It increased NPA’s of the bank. SBI FlexiPay Home Loan is a sort of teaser loan as the EMI will be increased/stepped-up after the moratorium period is over. Therefore, it is offered only to salaried individuals with an assumption that salary will increase during the moratorium period.
The second similarity is that when teaser loan was launched by SBI in 2008 the interest rates were low at around 8.5%. When the borrower shifted to floating interest the interest rates increased to around 10% plus. As i mentioned, currently interest rates have bottomed out. Therefore, if interest rate follows the same cycle as of 2008 then the borrower will be in a fix after 3 to 5 years. This time shocker will not be an increase in interest rate but the addition of a principal component to EMI. If interest rates increase during this period then EMI will be much higher as the bank will have to close the home loan as per pre-decided tenure. The addition of principal component will be directly proportional to increase or decrease in Interest rate during the moratorium period.
Another co-incidence, the market entered a bear phase when teaser loan was launched in 2008 and so as this time :).
As i shared that practically principal outstanding will remain same during the moratorium period. Once the borrower will decide to prepay the home loan, it will be the biggest shocker for him. Though product clearly mentions that borrower will pay only interest during the moratorium period. The borrowers will fail to understand the practical implication of same. Even today i receive queries from borrowers that they already paid XYZ amount but principal outstanding is not moving.
Job Stability and Regular Increase in Salary/Income:
These are the two basic assumptions behind SBI FlexiPay Home Loan. Therefore, it is being offered only to the salaried individuals. If god forbids and something goes wrong at borrowers end then the entire calculation will go haywire. A borrower will be in deep trouble on three accounts i.e. Principal outstanding is intact, Home Loan is 20% higher than normal and Full EMI will start after moratorium period. In short, this product is only suitable for borrowers with a stable job and an assured increase in income/salary at a regular interval like Govt employees. Job scenario is not that great in private sector as i shared in my post, can you rely on your job?.
Profitable for Bank:
This product is super profitable for the bank. At first place, the bank will be able to lend 20% more compared to normal loan. Secondly, the bank will be assured that average home loan tenure of a loan under SBI FlexiPay Home Loan will be higher than average 8 years. Roughly, you can add moratorium period selected by the borrower to average home loan tenure. Therefore, if under normal home loan i would have closed the home loan in 8 years. SBI FlexiPay Home Loan will be closed in 12 years if my moratorium period is 4 years. It means higher interest income for bank thus higher profitability. Lastly, by increasing the home loan eligibility. Bank will create an EXIT barrier for borrowers. The reason being, borrower’s eligibility with other banks will be lower for balance transfer. In short, the borrower will not be able to transfer the home loan.
Words of Wisdom: If i have to explain SBI FlexiPay Home Loan in one sentence then i will say that you are borrowing more than your comfort zone. It is based on fulfillment of certain assumptions. If the assumptions go right then nothing wrong with it but if it goes wrong then it’s a doom scenario. I shared some of the points, a borrower should consider. You should check all the pros and cons before signing on the dotted line.
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