Does HSBC’s home loan pay-back offer work for you?

Thirty-seven-year-old Shailesh Parekh (name changed) is married, with one daughter, and currently living with his parents. However, he is looking at buying his own house for investment purpose.

While scanning through various bank rates, a friend informed him about HSBC’s ‘pay-back offer’, which will close on July 31, 2011.

Parekh is in a predicament whether he should go with the scheme, because the scheme has its pros and cons.

According to statistics from India Online, around 65% of the population is below 35 years.

This means the working population is increasing and so is their spending capacity. This can be substantiated, if we take a look at State Bank of India (SBI) and HDFCs home loan portfolio. At the end of March, SBI’s retail home loan portfolio grew 22%, standing at Rs86,769 crore, while HDFC grew 27%, now at Rs85,649 crore.

In today’s rising interest rate scenario, HSBC’s scheme looks lucrative, as the bank is promising to pay back 50% of the interest paid, on the 12th, 24th and 36th equated monthly installments (EMI). So, if the interest on your 12th EMI is Rs50,000, you get Rs25,000 back.

The rates offered by HSBC are competitive compared with SBI’s. HSBC India offers a 10.75% rate for a loan above Rs75 lakh, which is lower than State Bank of India’s 11% for the same value.

While taking loan, one should consider the prepayment penalty also. HSBC charges a prepayment fee that can be as high as 3% or even 0%, depending on the relationship the customer shares with the bank. But a 3% penalty sounds higher, against the industry average rate of 2% if more than 25% of the loan amount is prepaid at a time.

“These are marketing gimmicks and a person should rather see what the effective cost of the loan is. If the effective cost is lesser than others it makes sense to take the loan. But while taking a loan, one should consider factors such as pre-payment possibility without penalty. This is very useful for many, as many want to prepay and finish off their liability as soon as possible,” says Suresh Sadagopan, who runs Ladder 7 Financial Advisory Services.

The only condition is the borrower must have a savings or current account with HSBC Bank, as they will credit the refund to this account.

“We offer free savings accounts to our mortgage customers and there is no minimum balance stipulation for this account nor any balance related charges are levied on this account,” says Manish Sinha, head- consumer assets, HSBC India.

HSBC will finance properties that are either under construction or ready for possession.

“But the condition is that the loan is given to only those customers buying it from HSBC’s list of approved properties. In case the property is unapproved by HSBC and the customer still wishes to take loan then, the bank evaluates and sanctions the loan only if it fits their bill,” added Sinha of HSBC India.

HSBC usually charges Rs10,000 flat as processing fee, but taking into consideration the length and breadth of the customer, the bank may waive this off as well many a times. The special offer is valid on floating rate home loans, but is not valid on smart home and Smart LAP (loan against property) schemes of the bank.

But the question of tax remains unclear, whether the refund amount will be liable for income tax.

“Ideally if the person takes advantage of this scheme, then the 50% sum returned to him should be adjusted against the interest paid by that person to HSBC India and it should not be treated as an income,” added Sadagopan.

“But the fact remains that it is a very simple and attractive scheme. “This will drop your effective interest rate to 10.84% from 11%. It is unclear on what happens if the interest falls or rises during the first 36 months (though it looks like the interest component based on the latest rate as applicable for the 12th, 24th and 36th installments is applicable).

Also, hopefully the agreement has no clause to take back the credit of this interest already given in case you default after the 36 months,” says Harsh Roongta, CEO Apnapaisa.com.