Axis new home loan: Is it really a 'happy ending'?

While deciding to go for a loan, one has to remember that interest rates are expected to fall. So, read the fine print before taking a final decision.

Bindisha Sarang December 20, 2014 12:41:48 IST
Axis new home loan: Is it really a 'happy ending'?

Axis Bank Ltd has launched a Happy Ending Home Loan product, which waives off the last 12 equated monthly instalments (EMIs), provided the customer has paid all EMIs on time.

"We want to encourage good credit behavior and want to reward loyal customers with this offering," said Jairam Sridharan, head consumer lending and payments, Axis Bank Ltd.

The offer is only for floating rate home loans. So as per the bank's current rate structure, for loans less than Rs 25 lakh, the rate of interest will 10.75% per annum. For those between Rs 25 lakh and Rs 75 lakh, it will be 11 percent and for those above Rs 75 lakh 11.25% . The bank's base rate is 10%.

The scheme is applicable only for loans with a tenure of 20 years or more, and only to the ones that are held with Axis Bank for at least 15 years (180 months). The processing fee for is up to 1% of the loan amount.

Devil in details?

According to a document given by a source close to the bank, waiver amount shall be the lowest of the following:

a) the principal outstanding of the last 12 EMIs; or

b) the principal outstanding of the residual EMIs (if less than 12) if the borrower holds the loan for 15 years (180 months) from the date of first disbursement; or

c) the 12 EMIs as computed at the time of disbursement (excluding any part prepayments made by the borrower).

Also, the scheme will be applicable only if the borrower does not change the EMI and/or tenure of the loan (other than on account of a change in the bank's base rate and/or part prepayment made by the borrower or for any other reason at the sole discretion of the bank).

Axis new home loan Is it really a happy ending

The prepayment date is fixed as the 5th of every month and the borrower will not get the waiver benefit if this date is changed at the request of the borrower.

The borrower get disqualified for the benefit, even if the tenure falls below 180 months or 15 years as part of the adjustments done to the base rate of the bank.

The prepayment date is fixed as the 5th of every month and the borrower will not get the waiver benefit if this date is changed at the request of the borrower.

The scheme will not be applicable if the borrower chooses to convert the floating rate loan into fixed rate. However, you can switch the loan from higher 'floating' rate to lower 'floating' rate by paying applicable fees as per lenders' policy.

Number crunching

Now let's look at an example of a 20-year Rs 50 lakh loan with a rate of 11%. The total cost of the loan, excluding the 1 percent processing fee (Rs 50,000) would be Rs 1,23,86,160, but with 12 EMI's waived off, you would save around Rs 5,83,938 and the total cost of the loan would come down to Rs 1,18,02,222.

Sounds like a great saving? But, hold until we compared this with State Bank of India's home loan-by far the cheapest available today. The country's largest lender has a rate of 10.40 percent per annum for a similar home loan.

The total cost of the loan comes to around Rs 1,19,00,160. Compared with this, the new Axis Bank home loan is cheaper by Rs 97,000.

Now, add the processing fee to the cost. SBI's fee is in the range of Rs 1,000, while Axis Bank's fee is up to 1 percent. After taking this into account, Axis Bank's loan is cheaper by just around Rs 50,000.

In other words, a savings of Rs 5,83,938 is translating into a cost advantage of just Rs 50,000 when compared with cheapest loan available in the market.

Should you go for it?

On the one hand, the incentive will encourage you to pay your EMI's on time, helping you build a good credit history. On the other, it stops you from switching the loan to another lender in the future, even if others offer lower rates.

There are a no prepayment fees as per the RBI on floating rate home loans, and your prepayment options will be slightly restricted with this loan.

This is because as per the condition, the borrower should keep the loan with Axis Bank for at least 15 years. So, if the borrower is pre-paying, it has to be done in such a way that the tenure remains above 15 years, to get the benefit of 12 EMI waiver.

So let's say you have a 20-year loan and you part-prepay in such a way that your tenure falls below 15 years, you would not get the waiver. However, if you prepay in such a way that your tenure does not go below 15 years, you stand to gain.

But how many people hold the loan for 15 years? Very few. "A survey conducted by a housing finance company showed that most people prefer to prepay home loans. And loans usually get prepaid and close with 7 to 12 years," said Vipul Patel, CEO, Home Loan Advisors.

But Sridharan begs to disagree. "That trend was a decade ago. People going for bigger and better has made prepaying EMI's difficult. Also with rate being high, many are unable to prepay EMIs," he says.

"The average age of home loan borrowers has gone to lower 30's compared with 40's a decade ago. So borrowers have a good 20-plus year of work life to complete the loan repayment schedule and hence, are not too keen on pre-payments," he adds.

If you compare the Happy Ending Loan with the same bank's regular loans, sure you save a good amount, as per the example we showed. But you should also compare the scheme with other lenders in the market.

"If banks want to give a discount, you should give it upfront and not after years," Patel says.

"With prepayment penalties gone, how else can banks ensure that customers stay with the bank?" concursanother loan expert, who did not want to be named.

He doesn't see anything wrong with the move, if there is no plan to switch loan.

"It has its valid reasons. But, instead of looking at rebates after 15 -20 years, you should look at where the banks base rate will head," says he.

While deciding to go for a loan, one has to remember that interest rates are expected to fall. So, read the fine print before taking a final decision.

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