Recently, we reviewed SBI Flexi Pay home loan to help first-time borrowers. While studying Flexi Pay, we realized that there are a lot of terms borrowers might not be familiar with. To help you get a crystal clear understanding of the home loan, we created this article. Let us guide you through a simplified explanation of the different terms that you will come across in the review. There are 4 important terms:
Home Loan eligibility
Additional Loan amount
Home Loan Eligibility:
Simply put, eligibility is the maximum home loan amount that you can borrow from a lender. When you apply to a lender for a home loan, they do a risk assessment of your profile. Things like credit score, income, age, education, job stability are considered but the two main factors are
Loan To Value Ratio
EMI – Net Monthly Income Ratio
Don’t stress, it’s easy to understand.
Loan to Value Ratio (LTV):
Say LTV is 80% for home loans between 30Lc and 80LC. If the house you want to buy costs 50Lc, then you can take a home loan for 80% of 50Lc = 40Lc.
Net Monthly Income is calculated by subtracting tax, personal loans and other monthly payments. Net Monthly Income is a big factor because loan EMIs cannot exceed 50-60% of your monthly income. This is the EMI/NMI ratio: you can only pay a certain amount of EMI based on your NMI. The reason is so that you are not overburdened with the repayment and have enough funds left for your other expenses. Think about it from the lender’s point of view: keeping the EMI to half your monthly incomes makes them feel safer about lending you their money. That’s why EMI/NMI is an important factor.
Additional Loan Amount:
The bigger the loan, the bigger the house!Flexi Pay allows you to take a home loan which is 20% higher than your loan eligibility. The extra money lets you to buy a pricier house than what you can buy with a normal home loan. Say your home loan eligibility is Rs. 60Lc. With Flexi Pay, you can take a home loan for Rs. 72Lc. That’s 12Lc more!
Greek? Latin? Gibberish?‘Moratorium’ means ‘to delay’. Well that makes sense. Because during the moratorium period, you ‘delay’ repaying the loan. You pay a smaller EMI or ‘Pre-EMI’ which only pays off the interest on the home loan. Confused? Your EMI is basically made of two parts: Principal component and interest component. During the moratorium period, you only pay the interest component and delay paying the principal for a few years. You get the benefit of paying a smaller EMI and the lender gets interest for a few years without reducing your principal amount.In Flexi Pay, there is a compulsory moratorium period of 3-5 years. If you choose a moratorium period of 4 years (48 months), you will pay the Pre-EMI for 4 years and at the end, your principal amount will remain unchanged. The assumption by SBI in Flexi Pay is that by the time the Moratorium Period is over, your income will have increased sufficiently to start paying a higher EMI.
Normally, EMI remains constant unless interest rate changes. In Flexi Pay, the EMI amount increases over time. In total, there are 4 EMI amounts that you have to pay in Flexi Pay:
EMI 1 or Pre-EMI: The Pre-EMI is charged during the moratorium period. As compared to the EMI of a normal home loan, this is a lower amount. The reason for this is that you are only paying the interest on the loan amount and keeping the principal amount unmoved.
EMI 2: EMI 2 is charged from the end of the moratorium period. EMI 2 is higher than EMI 1 because it goes towards paying the interest as well as reducing the principal amount. From EMI 2, the outstanding principal amount starts to decrease. EMI 2 is charged for 36 months.
EMI 3: EMI 2 is only charged for 36 months i.e. 3 years after the end of the moratorium period. EMI 3 is 5% higher than EMI 2. EMI 3 is charged for 36 months.
EMI 4: After EMI 3 is charged for 36 months, EMI 4 starts. EMI 4 is calculated by considering the outstanding principal amount at that point and the remaining tenure. EMI 4 continues till the end of the tenure.
Done! Congrats on sitting through this technical write-up. You can keep this article as a quick reference while you read the Flexi Pay review. If you feel we missed out on something, do let us know in the comments below and we’ll try and add it to this article. As a parting advice, we would just like to say: Research as much as you can before you make a decision about your home loan. Read articles, use online tools for comparison of different loan schemes and ask as many questions as you need. It will help you dodge uncomfortable situations tomorrow.
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