A home loan has to be repaid during its tenure, by way of equated monthly instalments (EMIs). The amount of the EMI, as the name suggests, remains the same throughout the tenure of the loan, unless there are circumstances like changes in the interest rates, warranting a change in the amount of EMI. Home loan providers have been trying to innovate, with their offerings. Axis Bank has introduced a product called ‘QuickPay Home Loan’, where the amount of EMIs go down gradually, as the interest comes down.
What is Axis Bank’s QuickPay Home Loan?
This is nothing but a reverse of another popular product called the ‘telescopic home loan’, which is provided by various lenders, including HDFC Limited, where the amount of instalment gradually goes up. This product is useful for the people who are at the starting point of their careers and therefore, their income is also relatively low. A significant number of young people have been buying their first homes, at the beginning of their careers. The telescopic home loan takes into account the potential for increase in the income of the borrower and thus, helps the borrower to get a higher amount as home loan and that too, for a longer tenure of 30 years.
The QuickPay Home Loan of Axis Bank is nothing but the reverse of the telescopic home loan product, where the amount of instalment goes down gradually. This can only happen with relatively higher instalments at the initial stage, as compared to traditional home loan products.
Should property buyers opt for the Axis Bank QuickPay Home Loan?
The main selling point for the QuickPay Home Loan, is that the overall interest cost comes down significantly. This is a myth, as the borrower pays the interest for the period for which he uses the money.
So, logically speaking, this product does not reduce your interest cost, relative to the use of the money by the borrower. Hence, a regular home loan may be better, for various reasons.
Firstly, a majority of home loan borrowers use up all of their savings, to make the down-payment for the property. Buyers may also have to borrow from friends and relatives, to fund the margin money, which has to be paid simultaneously, while servicing the home loan. Moreover, the home buyer has to spend for at least the basic furnishings in the house. Under these circumstances, it may not be feasible for an average home buyer, especially those at the beginning of their careers, to service the higher amount of home loan instalments.
The QuickPay Home Loan is available under the floating home loan rates regime, where the banks and housing finance companies, cannot charge any prepayment penalty. So, when one can prepay his regular home loan, as and when he has surplus money available with him, without incurring any additional cost, why should one commit to higher home loan instalments, with the accompanying risk of default in servicing it?
One can always get the overall interest cost reduced, by prepaying part of the home loan at regular intervals, depending on availability of surplus funds. With regular home loans, you also have the flexibility to plan your prepayment, to maximise your tax benefits, under Section 80C with respect to the principal prepayment, as well as interest benefits, under Section 24b of the Income Tax Act. Additionally, the interest rate for the QuickPay product is a little higher than that for a regular home loan. Hence, I would not recommend this product to any home buyer, irrespective of whether he is at the beginning of his career or in the middle of his career.
(The author is a tax and investment expert, with 35 years’ experience)