It’s difficult to miss HSBC India Ltd’s latest advertisements for its home loan product: flip through any newspaper or magazine, or look out at hoardings in streets or at bus stops, it’s everywhere. HSBC is currently running a special payback offer on its home loan till 31 July.
Mint Money ran a few numbers to see if this offer makes sense for you or you are better off with another lender.
What’s the offer?
Manish Sinha, head (consumer asset), HSBC India Ltd says, “Our payback offer is on home loans as well as loans against property. With this offer, the customer gets a 50% refund of interest paid in the 12th, 24th and 36th equated monthly instalment (EMI).”
Also see | When It Makes Sense (PDF)
The EMI has two components—the principal and the interest amount. So if the interest part in your 12th EMI (at the end of the first loan year) is Rs40,000, you get back Rs20,000. Similarly, 50% of the interest part paid in 24th and 36th EMIs will get reimbursed.
The money is directly credited into your savings account after 30 days of paying the instalment. Typically, interest has a higher proportion in the EMI than the principal amount in the first few years of a loan. In the first five years of the loan, the EMI could account for nearly 50% of interest in a 15-year loan.
Says Vipul Patel, director, Home Loan Advisors, an independent mortgage advisory firm, “The psychology of an India consumer is very discount-oriented. He thinks why should I change the loan if I’m getting a discount here. Rates are expected to be hiked around August and this move will help the bank retain its customers at that time.”
Other loan details
Based on the city you live in, you can get a loan between Rs5 lakh and Rs5 crore. For example, if you live in Delhi or Mumbai, the maximum amount you can get is Rs5 crore and for any other metro, such as Chennai and Pune, you can get up to Rs3 crore. Of course, your repayment capacity will also be considered.
The base rate applicable to the offer is 9% and the mark-up is 1-2%. The processing fee is up to 1% of the loan amount, subject to a minimum of Rs10,000 plus a service tax.
You cannot prepay the loan for the first six months after disbursal. Subsequently, every financial year, you can prepay up to 25% of the sanctioned amount at no additional fee. Prepayment in excess of 25% per financial year will attract a penalty of 3% of amount prepaid. Remember that you will lose the benefit if there is any delay in paying the EMI. Sinha says, “The payback offer is a loyalty reward for our customer.”
Odds against other loans
To compare its cost with other loans, we ran some numbers on a loan amount of Rs75 lakh taken for a tenor of 15 years. HSBC’s base rate is currently 9% and we assumed the mark-up at 2%. We compared HSBC’s payback offer on home loans at 11% interest rate with a loan from another bank, say, ABC Bank at 11%, 10.80% and 10% (see graph).
Scenario I: When both banks are at 11%, it is better to go for the HSBC loan. Whatever the processing fee (up to 1%), the total cost of loan at present value is cheaper in HSBC as compared with the total cost of loan in ABC Bank at the same interest rate. The total cost includes the principal and total interest paid; the discounts in HSBC have been deducted for comparison. Present value is the current value of a future stream of payments and inflows; it is used to compare proposals with different cash flows at various points in time.
Scenario II: Keep HSBC’s rate at 11% and reduce ABC Bank’s interest rate by 20 basis points, at 10.80%, and HSBC starts losing out in terms of total cost. But negotiate the processing fee and the HSBC offer can look better.
Scenario III: Reduce ABC Bank’s rate to 10%, keeping HSBC at 11% and the HSBC loan turns out to be more expensive at any level of processing fees. However, check with a few lenders before deciding on the loan. Loan comparing websites will also give you information on interest rates and fees offered by various banks; they also have calculators that will help you make an informed decision.
Graphic by Yogesh Kumar/Mint