- Shall you choose a home loan with an EMI waiver offer instantly or do some calculations?
- Do the latter so that you don’t regret later on!
While taking a home loan, one does all sorts of calculations to ensure the repayment, which usually spans for 20-30 years, turns out to be a smooth experience for him/her. Amidst all this, a lender comes and announces an EMI waiver for say 6 months or more. What will be your reaction? Will you apply for the same instantly or do some introspection before taking a plunge? It is advised to follow the latter as you not only need to put a curb on your home loan outgo but also require some flexibility to ensure the repayment journey proves good for you. Let’s check out what this offer means to you along with its pros and cons.
What is a Home Loan EMI Waiver?
As the name suggests, a home loan EMI waiver decreases the repayment of borrowers. The extent of reduction will depend on the time for which the offer will remain valid. The amount of reduction can also vary depending on the stage at which you get the waiver. The principal and interest portion of the EMI keeps changing from one month to another. Plus, in a long-term loan like a home loan, the interest portion of the loan will continue to be greater than the principal amount for nearly half the length of the loan. All that will influence the actual reduction. Now it depends on the lender whether it gives you the waiver in one go or in tranches.
So Which Lenders Offer a Waiver on Your Home Loan?
As of now, two lenders come with an EMI waiver on a home loan. These are Axis Bank and LIC Housing Finance Limited. With Axis, there will be an EMI waiver for 4 months each at the end of 4th, 8th and 12th year of the home loan. However, the offer is applicable for a loan amount upto INR 30 lakh only. Further, the offer will cease to exist on missing even a single EMI. As far as LIC is concerned, the EMI waiver will be for 6 months on a ready-to-move property.
Is it Worth Availing a Home Loan EMI Waiver Offer?
A home loan EMI waiver usually comes out with some conditions for a borrower. Most likely, lenders disallow a balance transfer and impose restrictions on prepayment. Plus, the loan must come with a minimum period clause means the repayment will continue for a minimum period as fixed by the lender. No prizes for guessing, the minimum repayment period will most likely be 20 years. Given the conditions that may come with a home loan EMI waiver, we will need to weigh this offer with each of three clauses – repayment tenure, balance transfer and prepayment – to arrive at a better conclusion.
EMI Waiver vs Repayment Tenure Clause
For example, you require a home loan of INR 60 lakh and can get the same at INR 8% per annum. In the EMI waiver offer, the repayment tenure is assumed to be a minimum of 20 years. Assume the EMI waiver is given for 10 months after 10 years of repayment. But if someone takes a loan for 15 years, how will it all matter to you? Let’s check out the table below.
|Repayment Aspects||Normal Home Loan with no EMI Waiver||Home Loan with an EMI Waiver of 10 Months|
|Tenure||15 Years||20 Years|
|Normal EMI||INR 57,339||INR 50,186|
|Interest Outgo without EMI Waiver||INR 43,21,043||INR 60,44,737|
|Interest Amount to be Saved with EMI waiver||N.A.||INR 2,68,861|
|Interest Outgo with EMI Waiver||N.A.||INR 57,75,876 (60,44,737-2,68,861)|
|Principal Amount to be Saved with EMI Waiver||N.A.||INR 2,32,999|
|Total Interest Outgo - Principal Saved with EMI Waiver||N.A.||INR 55,42,877 (57,75,876 -2,32,999)|
So you can see, despite a 10-month EMI waiver on a 20-year home loan, the cost of borrowing is INR 12,21,834 (55,42,877-43,21,043) higher than when a loan is taken for a shorter tenure of 15 years without an EMI waiver. Seeing this will make you choose the conventional home loan offer. However, the normal home loan with no EMI waiver comes at a higher monthly obligation of INR 7,153 (57,339-50,186). So, your income should be such that the increased EMI comes to your budget smoothly. If that happens, the lender will have no problem getting your tenure to 15 Years. As a general concept, the total monthly obligations including your home loan EMI must not exceed 50%-60% of your net monthly income. But that criterion is set to change based on the loan quantum and the income slab of an individual.
EMI Waiver vs Balance Transfer
In a long-term loan like a home loan, you get maximum opportunities for a balance transfer deal at significantly lower interest rates. Since the EMI waiver-backed home loan won’t give you that leverage, will it be worth going with such an offer? Sticking to the example shown above, the interest outgo on a 20-year home loan of INR 60 lakh with an EMI waiver comes as INR 57,75,876. Now, if you choose a normal home loan of the same amount for the same period and get a balance transfer opportunity after 5 years at 7.50% per annum, how much will be your interest outgo overall? Let’s check out the table below to know the same.
|Original Loan Amount||INR 60,00,000|
|EMI Payable Till 5 Years at 8%||INR 50,186|
|Interest Payable for the Whole 20 Years @8%||INR 60,44,737|
|Interest Payable Till 5 Years @ 8%||INR 22,62,719|
|Likely Outstanding Loan Balance||INR 52,51,535|
|New EMI @7.50% for the Remaining 15 Years||INR 48,682|
|Interest Payable @7.50% Over the Remaining 15 Years||INR 35,11,293|
|Interest Payable Over 5 Years @8% + Interest Payable Over the Next 15 Years @7.50%||INR 57,74,012|
|Reduced EMI via a Balance Transfer||INR 1,504|
|Reduced Interest Outgo via a Balance Transfer||INR 2,70,725|
The savings on a balance transfer comes as INR 2,70,725, which is quite shorter than the savings of INR 5,01,860 you’re likely to have with an EMI waiver. Further, a balance transfer comes with a flat fee that the new lender will charge. With that in effect, the savings on a balance transfer will be even lesser than an EMI waiver-backed loan. But if the balance transfer deal comes at a much lower rate, the equation can change drastically.
EMI Waiver vs Prepayment (In Full or Parts)
Lenders allow a prepayment facility to home loan borrowers without charging them the same, provided it is a floating rate loan. You can either pay the total outstanding balance or a part of it after paying the loan for a stipulated period. Most lenders allow prepayment in full or parts after successful payment of the first 12 EMIs.
In case you look to prepay after 10 years, how will it show on your repayment? Let’s check out the savings on full prepayment and part-prepayment in the table below, sticking to the above example.
|Repayment Aspects||Full Prepayment||Part Prepayment|
|Loan Amount||INR 60,00,000||INR 60,00,000|
|Tenure||20 Years||20 Years|
|EMI Payable @8%||INR 50,186||INR 50,186|
|Interest Payable @8% for the Whole 20 Years||INR 60,44,737||INR 60,44,737|
|Interest Payable Till 10 Years @8%||INR 41,58,806||INR 41,58,806|
|Outstanding Loan Balance after 10 Years||INR 41,36,437||INR 41,36,437|
|Savings of Interest on Full Prepayment||INR 18,85,931||N.A.|
|Part Payment Amount||N.A.||INR 8,00,000|
|Outstanding Balance after Part Payment of INR 8,00,000||N.A.||INR 33,36,437|
|EMI Payable on INR 33,36,437 Over 10 Years @8%||N.A.||INR 40,480|
|Interest Payable on INR 33,36,437 Over 10 Years @8%||N.A.||INR 15,21,197|
|Interest Payable before Part Payment + Interest Payable after Part Payment||N.A.||INR 56,80,003|
|Interest Savings on a Part Payment||N.A.||INR 3,64,734|
A full prepayment wins the battle fair and square over the home loan EMI offer with no such facility. However, clearing the loan before the loan tenure can be a cumbersome task given the standard of living you want to have along with the challenges that inflation presents to you. However, a part payment can still be a viable option for you. And you can see the savings via a part payment is significant but still falls short of INR 5,01,860 you are likely to have with an EMI waiver offer.
After all these calculations, we conclude that a home loan EMI waiver offer may not necessarily be good to you financially. So, you need to use the Home Loan EMI calculator to know the likely repayment estimate with an EMI waiver offer and compare the same with other options shown in this post. Depending on loan variables, the repayment can vary. Only when you have significant advantages with an EMI waiver offer shall you go for it.
Note – Calculations are purely indicative and are shown for illustration purposes only.