State Bank of India (SBI), country’s largest lender, has announced a home loan scheme--SBI FlexiPay Home Loan-- under which the customer needs to pay only the interest component in the initial few years

State Bank of India (SBI), the country’s largest lender, has announced a home loan scheme -- SBI FlexiPay Home Loan -- under which the customer needs to pay only the interest component in the initial few years, thereby enabling salaried class get a higher loan amount more than their actual loan eligibility under the standard plan.

Under the SBI scheme, the customer will also be offered a moratorium of 3 to 5 years on principal payments. Thus, he needs to pay only the interest component in the initial years.

One must note that the EMIs will be stepped up during the subsequent years. The bank has promised ‘moderated EMIs’ after the moratorium period but hasn’t specified how ‘moderate’ will be this part.

The SBI press release says: The additional loan amount will help such professionals in acquiring better and spacious living spaces for themselves and their families, taking into account their future needs.

Typically, financial institutions offer home loans providing 80-85 percent of the property value known as Loan to Value Ratio (LTV). Under the SBI scheme, the customer can get about 20% more than what he would have actually received under a normal loan scheme (an average 50 percent LTV considering their net monthly income).

Other financial institutions too have home loan products that offer a higher amount of loans to the borrower increasing eligible loan amount anywhere between 5 percent and 25 percent compared with a standard product.

One such scheme is the Step-Up Repayment Facility by Housing Development Finance Corporation (HDFC), under which it offers bigger loan amount at fixed rate to the customer with low EMIs in the initial few years, which will be increased in the later years. What is different from the SBI loan is it offers a moratorium on interest payments for initial years.

SBI is aggressively pushing its home loan sales at an annual growth rate of 17 per cent. The bank is already the largest mortgage lender in the country with a loan book of Rs 1,70,899 crore until September, which is nearly 15.47 percent of its loan book. With SBI launching the Flexi-scheme, other lenders too will likely follow with similar products soon.

Banks have been aggressively pushing mortgage sales in the domestic market, where home loan penetration is as low as 8 percent of GDP, much lower compared with the developed markets.

Not just bankers, even real estate builders are aggressively pushing various schemes to push home sales. One such example is a no-interest scheme launched by Pune-based developer DSK, which recently announced a tie-up with Tata Capital to offer flats for customers with a loan facility from the financier at almost zero rate of interest.

Under the scheme, the buyer of a one bedroom flat can finish the repayment of his Rs 50.7 lakh loan flat in eight years. He needs to just pay the initial contribution of Rs 10.04 lakh (20 percent of property cost) and repay the rest in equated monthly installments (EMIs) of Rs 40,160, while DSK has promised to pay the interest component to Tata Capital on behalf of the customer. In other words, the customer needs to pay only the principal value of the property to own his flat.

Experts, including HDFC Chairman, Deepak Parekh, had questioned such schemes saying the customer in such cases, where full interest is being paid by the developer, will not get tax benefit on interest payment on such loans since the customer is not paying any interest and hence the tax benefit will be limited to the principal repayment. But DSK officials countered this argument saying the scheme offers interest rate benefit.

Teaser loans

In 2009, the SBI had launched its ‘teaser’ home loan products, where the customer will be offered lower fixed interest rates for a specific period initially, post which the interest rate will be readjusted to the floating structure, spiking the EMIs.

In a rising interest rate scenario, this could come as a shocker to the borrower who is used to paying lower EMIs in initial years and suddenly get exposed to high interest rate (and high EMIs) in the subsequent years. The scheme, which was later followed up by some other lenders, didn’t go well with the RBI and the bank had to finally withdraw the scheme.

This time around, the SBI has refused to call the Flexipay scheme a teaser scheme. "Here we are letting the customer to get a higher loan offering relaxation on principle component in the initial years," Jayanthi Lakshmi, chief general manager (real estate and housing development) told Firstpost.

“There is no way it can be compared with teaser loan since interest rate changed after the initial years from fixed to floating in the teaser scheme,” Lakshmi said.

But, if one purely go by the contextual meaning of the term ‘teaser’ (something that teases or provokes someone to do something), the latest scheme too is another version of ‘teaser’. The scheme is indeed appealing for any youngster looking to buy a house but do not have financial capacity to make own large contribution.

Since SBI is stipulating that it is taking caution to extend loans only to professionals and until the maximum limit of 80 percent Loan-to-Value ratio (LTV), there is no major risk in the scheme unlike the loans given away in the run-up to the 2008 financial crisis, where subprime borrowers (borrowers who lacked the creditworthiness or had poor credit ratings) were offered massive relaxation of credit standards.

But, the only question in this case is whether the borrower will be comfortable to service the loan when the sudden spike in EMI will occur after the initial moratorium period.

Theoretically, the SBI scheme is promising a loan amount to a customer which he isn’t actually eligible under standard credit assessment rules, going by his current income levels. The assumption here is that the income level of the customer will go up in the later years to the extent to support the increased EMIs post 3-5 years (when the size of the EMI will go up considering the principal amount will get adjusted to the EMI and even more if interest rates go up).

If one takes the example of a Rs 50 lakh loan, the EMI in the initial years will be around Rs 47,000. Post the scheme period, this can go up to Rs 55,000 or more with the addition of principal component and even more if the floating interest rate goes up in the market. The increase in EMI will be inevitable if the borrower has to finish the loan under the regular maturity period. SBI offers loans for maximum 30 years.

Someone who goes for this scheme and buys a house now, for which he isn’t actually eligible under normal circumstances, can find himself with inadequate resources to service the spike in the EMI amount post the specific period (if interest rates spike sharply and the principal component gets added) if his income levels do not grow as per the expectation. This can create difficulties for both the bank and the borrower.