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Publication: The Times Of |
Date: |
Section: Times Property; |
Page: 34 |
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WITHIN
YOUR REACH
Are you young, professionally qualified and employed in a company of repute? Your dream house may still not be out-of-bounds if you ask for step up repayment option, says SURESH S
Two important variables determine the burden on a
borrower. 1) The rate of interest. 2) The EMI amount. The burden would increase
when the rate of interest is increased and results in the borrower paying out
more. However, the EMI is constant for the duration of the term. As exceptions
to the rule, banks and Housing Finance Companies (HFC) may wish to lend higher
loan amounts that are based on the calculation of tomorrow's salary, ie, the salary that the borrower will be drawing a few
years later. Then the EMI would not be constant - today's EMI would be low and
an increased EMI would be determined today itself and in-built, to be commenced
after a few years. Such schemes are classified as step up loans.
Yours could well be the exception to the rule. In you,
the Bank/ Housing Finance Company finds an excellent case to base the loan
amount not on today's, but tomorrow's salary.
Loan amounts are determined by the repayment capacity
of borrowers which is essentially the EMI, which is divided based on your
salary today. This assessment is crucial since the loans have the longest
tenures in consumer credit - 10 or 15 or even 20 years. Today's salary is a
conservative way of appraisal to avoid defaults/NPAs.
However, considering that 15 years is a very long time and logically, a
salaried employee would get higher and higher take-homes with the passage of
time, a rigid approach would not be a good strategy. If loan amounts are based
on the present salary of an individual, the Banks/HFCs
may be losing a business opportunity for higher loan in deserving cases.
For example, LIC Housing Finance Limited offers a step
up option to professionals and executives who are less than 35 years of age and
have definite prospects of an increase in their income in the future. The EMI
will be stepped up in the sixth and 11th year in a tenure
of 15 years. The borrower has the choice of stepping up the initial EMI by
either 10% or 15% or 20%. Let us assume that an applicant wishes to apply for a
loan of Rs40 lakhs for purchase of property worth
Rs60 lakhs in T Nagar. He
has a savings of Rs20 lakhs. Based on his present
income of Rs65,000 per month, he would be eligible,
for a 15-year term, for a loan of only Rs32 lakhs. He
is unable to bridge the deficit of Rs8 lakhs. But he
is very keen to buy the property. Under normal circumstances, this would not
have been possible. However, considering that he is very well-qualified and
works for an MNC, a step up EMI could be considered and a
Rs40 lakh loan could be sanctioned. In the sixth
year, his EMI would be increased by 20% and in the 11th year, by another 20% as
follows:
(Rate of interest is assumed at 9% p a
)
Similar facility, extended by HDFC is called SURF,
expanded as Step Up Repayment Facility. The repayment is accelerated to give
the borrower a higher loan eligibility by stepping up
EMI in the third and seventh years. This, incidentally is used by savvy
borrowers as a tax planning device.(The reverse of this option is called FLIP -
Flexible Loan Installment Plan, where if the husband has 10 years of service
left and the wife, 15, the EMI is reduced in the last 5 years matched to only
the wife's income).
GIC Housing Finance labels similar schemes as step down
schemes. Such an option is not available to selfemployed
persons or businessmen.
So, if your heart is set on a house which looks beyond
the realm of the lenders, don't give up. There are definite possibilities you
could succeed by approaching the few institutions who offer step up EMI
schemes.
The author is Director, DMS Financial Services Private Limited and is a
visiting faculty at IIMs
