All you need to know about ‘interest-only’ home loans
Borrowers of Standard Chartered with a home loan ticket size of ₹35 lakh to ₹3.5 crore can choose to pay only the interest amount via equated monthly installments (EMIs) for an initial period of 1–3 years
PremiumRecently, Standard Chartered Bank launched an interest-only home loan facility for its existing as well as new home loan customers on the purchase of completed residential properties. An interest-only home loan is a facility in which the borrower pays only the interest accrued on the principal outstanding for a limited period of the loan tenure. That period is referred to as the ‘interest-only period’. No principal amount will be deducted during this period.
Borrowers of Standard Chartered with a home loan ticket size of ₹35 lakh to ₹3.5 crore can choose to pay only the interest amount via equated monthly installments (EMIs) for an initial period of 1–3 years.
After this interest-only period is over, the home loan facility will be treated like a normal loan account where the EMIs comprise of both the principal and interest till the maturity of the loan. This facility is also being extended to borrowers who wish to transfer their existing home loans from another lender to Standard Chartered.
SBI also provides this facility as part of its SBI Flexipay home loan product.
As per industry sources, various other banks can offer interest-only home loans depending on the negotiations with the borrower and the terms of the loan. Sometimes, the developers or the builders of the housing projects may also tie up with banks to provide interest-only loans for a certain period to the home buyers.
Raj Khosla, founder and managing director, MyMoneyMantra.com said, “Interest-only home loans are generally offered for under-construction properties and remain an attractive proposition as principal repayments commence only when a property is ready for occupation."
Points to note
Borrowers opting for this option may note that while the cash flow burden in the interest-only period comes down, the overall repayment amount to the lender during the entire tenure will be higher in this case. Let us take an example of a regular home loan of ₹50 lakh at a fixed interest rate of 8% for a tenure of 30 years. In this case, the monthly EMI amount comes to ₹36,688 and the total amount payable – principal plus interest – in the entire tenure would be ₹1.32 crore.
If you opt for an interest-only term of 3 years (36 months) in the above example, the monthly out-go in the first 3 years would be ₹33,333. After that, the normal EMI including principal and interest of ₹37,713 begins. In this case, the total cash outgo over the tenure of the home loan will be ₹1.34 crore. The additional liability, in this case, is about ₹2 lakh. This is a simplistic comparison. The amount may differ if the floating interest rate is opted by the home loan buyer.
Having said that, Khosla points out that one can take advantage of this offer by investing the differential amount of EMI during the interest-only period. He said, “If the returns from investments exceed the home loan interest rate, don’t repay the loan."
In terms of taxation, since there is no principal repayment during the interest-only period, deduction of up to ₹1.5 lakh under section 80C of the Income Tax (IT) Act for the principal portion of the EMI will not be available in such period. The interest amount (up to ₹2 lakh in case of self-occupied property) can continue to be claimed as a deduction under section 24 of the IT Act. In case, interest-only EMI is paid for the under-construction property, the interest amount is allowed as a deduction in five equal installments after the construction is completed.
Mint’s take
You should opt for this option only if your financial needs demand it. Most home loans are based on floating interest rates, which change with interest rate movements in the market. Since the interest rates are lower now, one would be better off repaying the loan and bringing down the outstanding liability, provided the borrower can repay EMI, including the principal amount.
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