ICICI Bank Extraa Home Loan is a new Home Loan product for retail borrowers. Currently, ICICI Bank Extraa Home Loan is available only in Greater Mumbai, Delhi & NCR, Bangalore and Surat. It seems that ICICI Bank is test marketing the product before full-fledged launch. These 4 cities are selected considering the target group and concentration of potential borrowers in mind. ICICI Bank Extraa Home Loan is available for Home Loans of up to 75 lacs. In layman terms, ICICI Bank Extraa Home Loan is useful for the borrowers who fall short on eligibility criterion due to age or income factor. As i keep highlighting in my Home Loan posts that in a normal scenario a borrower finalize the property first. As a 2nd step s/he apply for Home Loan and Home Loan Eligibility is fixed by the bank. If there is a shortfall between Home Loan Eligibility and Actual requirement then it is a catch 22 situation for a borrower. The only options left are to (a) Explore Alternative Sources of funding (b) Opt for top up or home improvement loan (c) Call off the deal. Now there is a 4th option i.e. ICICI Bank Extraa Home Loan
ICICI Bank Extraa Home Loan is a “Mortgage Guarantee” backed Home Loan. It is available only for first time property buyers. The most important points considered by banks for Home Loan Eligibility are Age and Income. Under normal home loan products, it is assumed that a borrower will retire by 60 years therefore if my age is 45 years then my maximum Home Loan tenure can be 15 years. Similarly, if my salary is low then i need additional funds to bridge the gap. Instead of running around, ICICI Bank Extraa Home Loan can help to bridge the gap. According to the website of ICICI Bank following are the key highlights or differentiating factors of ICICI Bank Extraa Home Loan
(i) A borrower has the option to enhance the home loan eligibility by up to 20%
(ii) A borrower can extend Home Loan tenure up to 67 years instead of existing limit of 60 years
The target group of ICICI Bank Extraa Home Loan are
(a) Middle age salaried borrowers who can extend home loan tenure by 5 years i.e. till 65 years of age (Max entry age 48 years)
(b) Young salaried borrowers who can increase home loan eligibility by increasing home loan tenure max up to 30 years i.e. till 67 years of age (Max entry age 37 years)
(c) Self employed Borrowers with irregular source of income
Lastly, to avail ICICI Bank Extraa Home Loan a borrower has to shell out 1.5%-2.5% of the loan amount as fees for higher/extra loan amount. This fees will be more for high risk cases like self employed borrowers. It is also known as Guarantee Fees. This fee is basically an insurance fee to cover the risk of additional/extra home loan amount. In case of any default on this extra amount, the IMGC (India Mortgage Guarantee Corp) will compensate the bank. Now it does not mean that this extra amount will be waived off from borrower’s outstanding liability in case of default. In case of payment default bank reserve the right to attach and auction the property to recover it dues even if the defaulted amount is insured by IMGC.
ICICI Bank Extraa Home Loan – IMP Points
In my opinion, ICICI Bank Extraa Home Loan is a smart marketing move. The only difference between existing Home Loan Products and ICICI Bank Extraa Home Loan is that max Home Loan tenure can be availed till borrower turns 67 years. The max home loan tenure is capped at 30 years. Besides this, there is no other advantage for a borrower. The 30 year Home Loan products already exist in the market. In a nutshell, under normal home loan a borrower of up to 30 years in age can avail 30 year home loan. Whereas under ICICI Bank Extraa Home Loan, borrowers of up to 37 years in age can avail 30 year home loan. Reg higher home loan eligibility, under normal home loan a borrower may opt for a top up or home improvement loan to increase the loan amount. I would like to highlight some of the imp points which a borrower should consider and understand before opting for this product.
(a) High Cost of Borrowing: As per illustrations available on the website of ICICI Bank, the tentative guarantee fees for diff target groups is as follows
Self Employed: 2.3% of Home Loan amount
Young Salaried Borrower: 2.1% of Home Loan amount
Middle Age Salaried Borrower: 1.53% of Home Loan amount
Now a guarantee fees of 1.5% to 2.5% sounds logical and rational but there is a catch. The catch is that guarantee fee is calculated on the total home loan amount. Ideally it should have been calculated on the extra amount sanctioned by the bank in lieu of guarantee fees. Therefore based on the illustrations shared on the bank’s website, the guarantee fees as a % of extra home loan amount is as follows
Self Employed: 12.63%
Young Salaried Borrower: 58.41%
Middle age Salaried Borrower: 14%
The actual financial impact will vary from case to case depending on the home loan tenure, interest rate, loan amount, EMI, risk profile, income etc. The above calculation is simply the guarantee fees as a % of the extra home loan amount. In layman terms, for 100 Rs extra Home Loan amount how much additional amount / Guarantee fees / Processing Fees you have to pay. Lastly, the guarantee fees as a % of the extra amount will be high if the difference between home loan eligibility and the requirement is small. In case the difference is big then ICICI Bank Extraa Home Loan can be beneficial in certain cases. In short, the cost of borrowing will be high in case diff between eligibility and requirement is small & vice versa.
Also, note that regular interest equivalent to Home Loan interest rate on this extra amount will over and above the guarantee fees. Therefore, the conclusion is that overall cost of borrowing of an extra amount is TOO HIGH. Moreover, an increase in Home Loan tenure will increase the overall cost of borrowing under ICICI Bank Extraa Home Loan. Lastly, as the average Home Loan tenure in India is 8 years, therefore, cost of borrowing of the extra amount will further increase if you close ICICI Bank Extraa Home Loan in 8-10 years.
(b) Loan To Value Ratio: Please note that ICICI Bank Extraa Home Loan is subject to overall LTV of 80% as per the guidelines of RBI. Based on the queries received from my readers and clients, there is a misconception that ICICI Bank Extraa Home Loan will bridge the gap between property value and the home loan eligibility. A borrower has to arrange 20% of the property cost and other charges like stamp duty, registration charges, processing fees etc from own pocket. Let me share an example.
Assuming i am buying a property of 30 lac. As per RBI guidelines, i can avail a max Home Loan of 24 lac i.e. 80% of 30 lac excluding stamp duty, registration charges etc. Based on my age, income and other factors, if my Home Loan eligibility is 80% then ICICI Bank Extraa Home Loan is practically of NO BENEFIT to me. It will come to my rescue if ICICI Bank fix my home loan eligibility 20 Lac then ICICI Bank Extraa Home Loan can only offer me an extra amount of 4 lac by charging guarantee fees. Balance 6 lac i.e. 20% of 30 lac and stamp duty, registration charges etc will be arranged by me from my own fund sources.
(c) Malpractices: In all probability, all other banks will launch similar products. I anticipate a probability of malpractices in future to force borrowers to avail similar products by paying guarantee fees. There is NO FIXED or STANDARD Formula to calculate Home Loan eligibility. It is subjective and subject to change. In future, banks may lay down more stringent conditions to fix the Home Loan eligibility. It will force borrowers to avail products similar to ICICI Bank Extraa Home Loan which is financially and commercially beneficial for the banks. I hope RBI will monitor the uptake of ICICI Bank Extraa Home Loan and similar products.
Concluding Remarks: In my opinion, the products similar to ICICI Bank Extraa Home Loan should be the LAST OPTION for a borrower considering the High Cost of borrowing. I still believe that a borrower should apply for Pre-Approved Home Loan to check the Home Loan Eligibility before finalizing the property. A borrower can explore options like the top up loan, home improvement loan or funding through alternative sources to bridge the gap between property value and sanctioned home loan amount. Personally i am not in favor of availing Home Loan higher than standard eligibility. The increase in Home Loan tenure increases the overall cost of borrowing. A borrower should evaluate and exhaust all other options before opting for ICICI Bank Extraa Home Loan. ICICI Bank Extraa Home Loan will be beneficial in very limited cases. A Borrower should calculate the cost of borrowing before signing below the dotted line as the cost of borrowing of an extra amount will vary on case to case basis.
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