Everything you need to know about “interest only” home loans

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Recently, Standard Chartered Bank launched an interest-only home loan facility for existing and new home loan customers when purchasing completed residential properties. An interest-only home loan is a facility in which the borrower pays only accrued interest on the principal outstanding for a limited period of the term of the loan. This period is called the “Interest Only Period”. No principal amount will be deducted during this period.

Standard Chartered borrowers with a mortgage ticket size of 35,000,000 3.5 crores can choose to pay only the interest amount via equivalent monthly installments (EMI) for an initial period of 1 to 3 years.

Once this interest only period is over, the home loan facility will be treated as a normal loan account where the EMIs include both principal and interest until maturity of the loan. This facility is also extended to borrowers who wish to transfer their existing home loans from another lender to Standard Chartered.

SBI also offers this facility as part of its SBI Flexipay home loan product.

According to industry sources, various other banks may offer interest-only home loans depending on negotiations with the borrower and the terms of the loan. Sometimes developers or builders of housing projects may also partner with banks to provide interest-only loans for a certain period of time to home buyers.

Raj Khosla, Founder and Managing Director of MyMoneyMantra.com, said: “Interest-only home loans are typically offered for properties under construction and remain an attractive proposition as principal repayments only begin when a property is ready. to be busy.”

Points to note

Borrowers who opt for this option may note that even though the cash flow burden in the interest-only period decreases, the overall amount of repayment to the lender over the entire tenure will be higher in this case. Let’s take the example of a classic home loan of 50 lakh at a fixed interest rate of 8% for a term of 30 years. In this case, the monthly amount of the EMI is 36,688 and the total amount to be paid – principal plus interest – for the entire mandate would be 1.32 crore.

If you opt for a term of 3 years (36 months) in the example above, the monthly expenses for 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 outflow over the life of the home loan will be 1.34 crore. The additional liability, in this case, is approximately 2,000,000. That’s a simplistic comparison. The amount may differ if the variable interest rate is chosen by the home loan buyer.

That said, 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 investment returns exceed the interest rate on the home loan, don’t repay the loan. »

From a tax perspective, since there is no repayment of principal during the interest-only period, a deduction of up to 1.5 lakh under Section 80C of the Income Tax Act (IT) for the main part of the EMI will not be available during this period. The amount of interest (up to 2 lakh in case of independent ownership) can continue to be claimed as a deduction under Section 24 of the Information Technology Act. In the event that an interest-only EMI is paid for the property under construction, the interest amount is allowed as a deduction in five equal installments after completion of construction.

The catch of the mint

You should only opt for this option if your financial needs require it. Most home loans are based on floating interest rates, which change with movements in market interest rates. Since interest rates are now lower, it would be better to repay the loan and reduce the outstanding liability, provided the borrower can repay EMI, including the principal amount.

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