February 12, 2016

SBI FlexiPay Home Loan-What is new and why should you avoid it?

Recently SBI Bank launched one more home loan product called SBI FlexiPay Home Loan. This loan feature seems to be attractive. However, how dangerous it is?

Let us first discuss the feature of this home loan.

  • Under this home loan, you will be eligible to receive 120% more than regular home loan eligibility. This means, let us say in a regular home loan you are eligible to receive Rs.50 lakh, then if you opted this home loan the eligibility will be Rs.60 lakh (120% more than regular home loan eligibility).
  • The minimum Loan amount must is Rs.20 lakh.
  • Salaried applicants with a minimum of 2 years experience and age between 21-45 years will be eligible for this home loan.
  • During property construction period (Pre-EMI), you will be allowed to pay only interest part of home loan in an EMI. This period is called as moratorium (Pre-EMI) period.
  • You can select the moratorium (Pre-EMI) period from 36-60 months (3-5 years).
  • After that, the regular EMI will start, which will be higher than the initial years.
  • Maximum Home Loan tenure will be 30 years.
  • The interest rate will be of a regular home loan. There is no special interest rate for this home loan.
  • Other terms and conditions will be same as applicable to regular home loans of SBI.

I tried to explain the same in below image in a simple way.

SBI FlexiPay Home Loan Feature

Looks attractive to those who looking for a higher home loan than their actual capacity or eligibility. However, the risks are more here.

The press release states, “The new offering, ‘SBI FlexiPay Home Loan’, will enable young working professionals / executives to get higher loan amount compared to their loan eligibility under normal Home Loan schemes. 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.”.

Great to know that someone cares you so heartily. Bank claims this loan gives you an opportunity to acquire BETTER AND SPACIOUS LIVING SPACE. However, at what cost?

The single main reason is to catch the retail customers than corporate. Because it is easy for banks to recover loans from retail customers than to fight with corporate.

Do you remember the real estate crash in the USA in the year 2007-2008? One of suchreason is INTEREST ONLY loans. This is called as Adjustable-Rate-Mortgage, where you were allowed to pay lower EMI initially and later on at higher EMI. Interest on such home loans was lower than the normal home loan in the USA. So people rushed at it. Lenders and borrowers never bothered about the capacity of loan repayment. Because of this mad rush, real estate price shoots up.

However, once the time arrived to pay the higher (actual) EMI, the majority of borrowers defaulted. Resulting into a big economic and real estate crash.

Now let us take an example of a person whose actual eligibility of loan is Rs.50 lakh. However, this home loan offers him Rs.60 lakh (120% more than regular home loan eligibility). More than what he is eligible for. There is no second thought about whether his income stream will increase or decrease in future. In addition, the bank never thinks of, once the actual EMI start whether the borrower will be able to pay it or not.

Here bank is taking too much risk. Because at first it is offering a loan of 120% more than regular home loan eligibility. It may reduce the risk by offering the lowest interest rate for this home loan. Because lower interest means lower EMI to the borrower. However, SBI kept the same interest rate as that of other regular home loans.

Let us consider the principal as Rs.60 lakh, interest rate as 9.55% and tenure 30 years. We assumed the borrower opted for 60 months of moratorium (Pre-EMI) period. Then, during this 5-year period, he just pays interest as an EMI. Yearly this interest will be Rs.5,73,000. So EMI during the first 5 years will be Rs.47,750.

After 5 years, the principal will be same as that of Rs.60 lakh. Because you have not paid a single rupee towards this principal. But only cleared the interest dues. So the actual EMI towards principal repayment starts after 5th year. Now the tenure will be 25 years ONLY (Loan Tenure 30 Yrs-C. So the EMI after 5th year will shoot up to Rs.52,630. A raise of Rs.4,880 per month.

So in the first 5 years for Rs.60 lakh loan you paid total interest of Rs.28,65,000 as interest ONLY. This means almost half of what you borrowed !

Now let us take the EMI as Rs.47,750 and tenure 30 years interest 9.55%. However, in this case borrower is opting for a regular home loan than SBI FlexiPay Home Loan. Considering factors like EMI of Rs.47,750, tenure 30 years and interest 9.55%, he can take home loan of around Rs.57 lakh.

Therefore, for same EMI of Rs.47,750 and for the sake of addition principal borrowing of Rs.3 lakh, the borrower has to pay 10% more EMI for rest 25 years. Because regular EMI is Rs.47,750. However, in case of SBI FlexiPay Home Loan EMI after 5th year will be Rs.52,630. The difference of 10% for the sake of Rs.3,00,000 additional loan.

The difference between the principal of a regular home loan to the SBI FlexiPay Home Loan if we consider the EMI as Rs.47,750 is just Rs.3,00,000. Whether you take the risk of default on your own for the sake of just Rs.3,00,000 more home loan??

SBI is leading banker in India. If this bank started such loan, then others too follow. What will be the effect? Borrowers rush to take such loans where their eligibility is waived off or postponed for future (after 5th year). This leads to more real estate BOOM (I may say BUBBLE), which we don’t know when it start to BURST.

To whom it is suitable?

  • For those borrowers, who are actually not eligible for higher loans, but looking for it.
  • For those borrowers, who can’t afford the EMI now, but predict their income will rise in future and the will pay the EMI after 3-5 years later.
  • For those borrowers, who are looking for BIGGER HOME than actually they afford.

What are the risks involved?

  • Higher home loan means higher EMI.
  • If your salary not increase in the manner you expected, then after the completion of moratorium (Pre-EMI) period, you feel it hard to pay EMIs.
  • If interest rate rise during moratorium (Pre-EMI) period, then your EMI will rise.
  • If interest rate rise after moratorium (Pre-EMI) period, then regular EMI will rise drastically. This may lead to more burden than you anticipated.

I feel more risks in opting for SBI FlexiPay Home Loan than advantages to borrowers. Any different views?

38 Comments

  1. Hi Basu ,

    Have high regards for you and your blog , please keep up the good work .

    I am thinking of investing in purchasing my first Plot via bank loan and would like to claim income tax benefits on the same . Lets Assume the plot cost is 70 lakhs and post construction cost is 15 Lacs . I plan to start construction of the house immediately after plot purchase and complete construction/take completion within 2 years of plot purchase

    Q1. Can i get a joint home loan (with wife) for 85 Lacs (70+15) or lesser for like 15 years and claim tax benefits on the interest paid upto 2 lakhs each year from day 1 of taking the loan ?
    Q2. Or I can claim tax benefits only after i furnish completion certificate post construction to the financial institution ?
    Q3. Or Do I have to take a plot loan first for like 85 Lacs and convert it to home loan for total 85 lacs after i furnish completion certificate to bank?
    And what is the minimum % of total plot area that needs to be converted to convert my plot loan to home loan ? Like example : Plot is 180 sq yards … so is there any formal rule on minimum constructed area that differentiates it to be called as a house/home and not a plot.
    Q4. Or I take a plot loan and even after completion certificate i cannot convert my Plot Loan to Home loan for income tax benefits ?

    Looking forward to your replies and advise on this topic.

    Thanks
    Pratik

    Reply
    • Dear Pratik,
      Never go for a LOAN just for the sake of TAX SAVING. There is no TAX SAVING if you practically think. Regarding the property, I suggest you first accumulate at least 50% of corpus from your own pocket.

      Reply
  2. Dear Basu

    Greetings of the day

    1) need information on Home improvement / renovation loan and its tax benefits & rate of interest of different banks
    2) for tax saving other than NPS employee contribution, is NPS employer contribution beneficial (10% of basic) for 30% tax bracket considering its EET later

    As of now home loan ( second home ) will be claimed by my husband for tax benefit . Please advice as tax on income is too much

    4) Can wife pay rent to husband & claim HRA 🙂

    Reply
      • 30% tax bracket. Please help me out in minimising tax payment.

        Reply
        • Seema-1) For Home improvement / Renovation loan, you can claim deduction on the interest under section 24(b). The maximum deduction amount is Rs.30,000 a year, and not Rs.2 lakh.
          2) Do you think TAX SAVING is the SOLE criteria for any investment? NPS is one of the badly handled, illiquid, no tax benefits in annuity product. Think and decide.
          3) No, wife can’t claim HRA benefits by paying rent to husband. Because it is considered as both are living under same house. Hence, it is not possible.

          Thinking too much on tax view may HARM your financial goals and life. Rest you decide.

          Reply
          • Thànks for your inputs. But I have read NPS given 12.5% return for last 5 years. Isn’t that true. As of Now I thought NPS is the only way to save some tax for me as I don’t have HRA and home loan. Please guide

            Reply
            • Seema-It is true but at what cost? Illiquid, no tax benefits and no control over your money. You just have to tight-lipped. Never concentrate too much to save each penny of tax. Even going for home loan for the sake of tax saving is one of the WORST financial decision. You go for home loan and pay Rs.100 interest to bank to save Rs.30 tax. To save tax of Rs.30, you pay to bank Rs.70. Is it worth or economical decision??

              Reply
  3. Sir, Which is better home loan on the following two
    1.Pnb hfl , 21 L home loan @roi 9.3% floating
    2.SBI flexi pay , 21 L home loan @ roi 8.6% (3 year moratorium period)
    Both in floating Interest rate
    Now my intake salary is 34k per month ,after 3 or 4 months it will be 50k per month.
    Sir please reply.

    Reply
  4. Hi Basu,

    I have got a home loan of amount 31,50000 from SBI on 9.15% of interest rate.for 18 months I have to pay the interest only EMI as per the bank , which is around 2305 till the first loan installment of 3,95511.00.My possession is in june 2018 but the bank official said I can show the current EMI amount in my savings under section 80C .

    Is this information is correct as I have asked few of my friends and they denied and said that the loan exemption is always shown after possession. Please confirm.

    Thanks,
    Vinit

    Reply
  5. Sir,
    I and my wife have taken a home loan jointly from SBI for a property jointly owned by us. In home loan agreement form it was mentioned that “the property shall be insured comprehensively against the market price”. As I infer from it that the property insurance is mandatory, but it is not mandatory to buy it from the SBI General Insurance. When I checked my loan account few days back I found that a premium of Rs 12696/- has been deducted against the SBI Long term home policy for 10 yrs duration. When I wrote an RTI to SBI, I asked them to provide the criteria adopted to choose SBI General insurance company as preferred insurer. SBI declined it stating that it was “commercial confidence” shown by bank in the insurer, which is totally against the fair lending policy. Also when I obtained the proposal form (filled by SBI RACPC) of Long term home policy from SBI General customer care, there were many misinformation like it was shown that property is solely owned by wife, her DOB, loan amount (that is really strange), it was mentioned that it is independent house and situated on 2nd floor, while it is on 7th floor, area of property etc. Also it (i.e. the proposer SBI RACPC) allowed SBI General to share our personal data, I have written a mail to SBI General for correction of information. Request you to answer following queries
    1. Due to the wrong information provided by the proposer (SBI RACPC), if there is a chance of claim refusal in future. Do you think that it was intentionally done by proposer?
    2. By deducting premium of home insurance policy from loan account, loan amount is increased and we will have to pay interest on it. Does SBI have the authority to deduct from loan account without asking from us? What measures can we take?
    3. Can I cancel the home insurance policy and take one on my own?
    4. Can I complain to RBI regarding this and how?
    Please provide your expert opinion. Thanks in advance.
    Vivek

    Reply
    • Vivek-They are doing is completely wrong and you have all rights to raise voice.
      1) Yes, claim rejection probability is HIGH. Also, it is illegal that someone other than proposer must fill the form.
      2) They don’t have such authority.
      3) YES, you have all rights to do.
      4) Yes, you have to.

      Reply
      • many thanks for prompt response.

        Reply
  6. Hi Basu,

    I am taking one flat for which i will be taking 35 lakhs loan.

    I have choosen SBI (9.15% interest) and HDFC (9.2% interest). I already have term insurance of 2 crore.
    When I spoke to SBI regarding not to take loan insurance, They agreed, but told it is mandatory to take at least property insurance which is around 35 thousand.

    In HDFC, insurance is not mandatory(both loan and property).

    Is it OK to take loan from HDFC?

    I dont like SBI attitude and dont want to run behind them for each and every communication after loan taken.

    Does HDFC reduce the interest rate when RBI decreases repo rate just like SBI reduces interest rate for existing customer?

    If I am saving 35 thousand in HDFC, is it worth taking loan from HDFC?

    Or spending 35 thousand and taking SBI home loan is good in long term?

    THanks,
    Pradipta

    Reply
  7. In your example,the loan amount is 60 lakhs. The entire loan goes to other bank. Assume that the entire amount is as a result of multiple deposits at various rates. Generally the period of deposits is low,say 36 months.The monthly interest from loan is 49000/. Major portion of this amount goes to payment of inearest of deposits.

    What about the principal?

    The principal from 240 months loan to meet the demand from 36 months period deposits!,
    Great mismatch indeed!!!!

    Why not the borrower save some amount during the 60 month interest payment period?
    If you choose 30 years plan, look for the balance at 75th/80the month from amortisation chart?
    When repayment starts after 60 months, do some extra remittance for the next 15 to 20 months to bring the liability to the above level?
    Thereafter life will look good.

    Reply
  8. Hi Basu,
    You’ re really doing a great job by providing helpful financial tips to the financially illiterate crowd.

    Reply
  9. Hi Basu,

    I’ve approached SBI branch to avail home loan, they advised me to opt their insurance/term plan to secure my home loan.
    Please advise your views which one to choose term/insurance

    Currently I don’t have term loan. Have some life insurance in LIC.

    Eagerly waiting your comments!

    Regards,
    Kithan T

    Reply
    • Kirthan-You can buy on your own. There is no obligation that one must buy the same from THEM ONLY.

      Reply
      • Thanks,
        One more clarification, can they disburse the loan amount without the insurance/ term plan?

        Reply
          • For protection, we are submitting our apartment documents, isn’t it?

            Do they need easy pay back option?

            Reply
            • Kirthan-Yes, if you buy term insurance, then it is easier than selling property and getting back the amount.

              Reply
  10. Very good info Basu , Thanxx

    Reply
  11. Nice post Basavaraj with detailed information…But worrying why SBI is providing such loans to customers. As a govt organisation, they need to provide good service instead of making huge profit

    Reply
    • Shanky-It is competition that is making them to float such plans. Also, if they lend to corporate then hard to recover in case of bad loans. However, they can easily target individual retail customers and recover loan.

      Reply
  12. I have maximum of hope on you sir(Basavaraj)? I’m benind you.

    Reply
    • That is not question mark symbol that is smiley but displaying as question mark.

      Reply
  13. sir..it is quite unfortunate that you don’t know the difference between link building and genuine feedback. An individual will be most idiotic person who will post comment as shared by me for link building…i think you have not read my comment…I have mentioned that thought process is copied not the content as such. I am confident that popular blogger like you will not copy the content..I agree that let the readers decide.

    Unfortunately, there is no mechanism to complaint to google if the thought process is copied. I will suggest them to introduce the same 🙂

    Reply
    • Sanjay-I know both the differences and very much know more about SEO and all. For your information, commenting is one of the many ways through which we build links. Thanks for saying that I copied the thought process but not content 🙂 You know one thing, there are few universal truths, which whether I say or you say are always true. For example, in personal finance world, below are few points which every planner or blogger recommend.
      1) Buy Term Insurance, 2) Buy it ONLINE, 3) Invest in Equity for long term goals. 4) Review your portfolio periodically and many such 1000+ universal truths.
      So do you feel these are copied ideas?

      Reply
  14. Sir, You have nicely copied lot of points from following post of Nitin Ji. As i have gone through trail post therefore by going through your post, i got a feeling that i am again going through trail post of Nitin Ji…You have intelligently re-worded the entire post and copied the thought process of Nitin Ji…I didn’t expected the same from you

    http://www.nitinbhatia.in/home-loan/sbi-flexipay-home-loan/

    Reply
    • Sanjay-Thanks for pointing. But Let me know one thing of what content I copied? I even don’t know who this person is (forget about copying). If you still felt I copied the content from this blog, then please inform this blogger to file a complaint with Google. They automatically degrade the blog which had copied content. Second thing, if I really practiced of copy pasting, then I might have deleted your comment. I am not doing it. Instead, I am publishing it and replying to your comment. Let readers of this blog decide. However, going by the post of link you shared, I felt nothing new but link building strategy by someone 🙂

      Reply
      • Seriously, I dont understand why Basu sir even published that link … not useful and it is purely a strategy to create links … I advice ppl not to click on the above link related to nithinbhatia … Just read the above post from Basu, more than sufficient … !

        Reply
        • Sandeep-No offence dear 🙂 You expressed your views. Also, you have every right to question my integrity when you feel so. No need to request also. Let readers click that link. They know the difference. Be cool!

          Reply

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