Need a bigger home loan, more time to repay?

Most lenders - banks and housing finance companies - are reluctant to extend home loans to salaried individuals beyond their retirement age, which is around 60 years. This means anyone above 40 years of age can get a home loan of up to 20 years only. However, now such individuals can get home loans that can be repaid till 75 years. This will help extend the EMIs over a longer time-frame and reduce the strain on the monthly budget. Else, if you can afford to pay higher EMIs, then opt for a higher loan amount to buy a bigger home.

These loans are called mortgage guaranteed backed home loans. The latest to offer this is LIC Housing Finance (LICHFL). ICICI Bank too has a similar product launched since 2015. Let us take a look at the features of this home loan and for what kind of borrowers it is suitable for.

How does it work

Both LICHFL and ICICI Bank have tied up with India Mortgage Guarantee Corporation (IMGC) to offer these loans. In case of LICHFL, the loan is available up to 75 years, while ICICI Bank offers it up to 65 years. The maximum tenure in both cases is 30 years.

LICHFL charges a higher interest rate for its loans. While the housing finance company's regular home loans start at 8.8%, the mortgage guarantee backed home loan starts at 8.95%. "Interest rates are slightly higher by 15-20 basis points, depending on the profile of the customer," says Vinay Shah, MD and CEO, LICHFL.

ICICI Bank charges an upfront commission ranging from 0.8% to 1.95%. Ravi Narayanan, head-secured assets, ICICI Bank, says, "The rate of the commission charged for this kind of loan depends on the loan-to-value (LTV) ratio and customer profile. If the LTV is low and the customer is employed in a good company, then the commission is low. But if someone who is self-employed and wants a higher LTV, the commission could go up.”

Under this partnership, IMGC will provide lenders with mortgage guarantee for losses that may arise from a default on the loan. This enables lenders to give higher loan amounts with extended tenures to customers, who may be otherwise perceived as riskier.

According to Ratan Chaudhary, head of home loans, Paisabazaar.com. mortgage guarantee backed home loans mitigate the risk arising from possible loan default on the borrower's part, by transferring a proportion of this risk to the insurer, that is, IMGC. "When the borrower defaults, the insurer pays the instalments on borrower's behalf, for up to two years. Meanwhile, either the borrower can begin regularising loan repayments, or the lender would take up other methods to recover the outstanding amount,'' he explains.

Benefits of this loan

The biggest advantage is that a salaried individual can get a home loan beyond 58 or 60 years, which is the typical retirement age. This increases the borrower's eligibility.

"Once you have seven more years added to your repayment tenure, you can get a higher loan amount. So, if the borrower was looking to buy one BHK, she can now buy a 2BHK. Typically, the amount increases by 20%. Or if you don't want higher eligibility, you can get a lower EMI since the cash flow is spread over seven more years. This gives the customer more breathing space in terms of repayment,'' says Narayanan.

According to Shah, this allows lenders to extend loans to those who were earlier refused on account of work profile, organisation profile, credit history, etc.

"Earlier we were giving loans only to those salaried customers whose risk levels were very low. Now we are exploring a new segment of customers,'' he adds.

Narayanan points out that with this type of loan the bank is able to include salaried customers who are employed with proprietorship or partnership firms with monthly salaries of around Rs 10,000.

Conditions to keep in mind

Borrowers must keep in mind that since their regular flow of income stops or gets reduced post-retirement, and the home loan tenure stretches beyond the retirement age of 60 years, it is wiser to try and prepay it before retirement. "However, in case you are unable to do so, make sure you have earmarked a portion of your retirement corpus for loan repayment. This amount needs to be equal to the entire outstanding home loan amount payable post-retirement. Additionally, your post-retirement emergency fund should ideally include an amount equivalent to at least 12 EMIs of your home loan,'' says Chaudhary.

According to Narayanan, people who retire at 60 years still have some amount of working life left in them. While they may not get a salary, they may have savings or other income. Besides, lenders also take a co-applicant in most cases. "In most of the cases, the co-applicant is gainfully employed and there is a capacity to repay the loan,'' he says.

In any case, borrowers can prepay anytime during the tenure of the loan, without any penalty, points out Shah.

Do borrowers pay more interest?

The overall interest outgo will be higher in this loan as against regular home loans because the repayment is extended over a longer tenure.

However, Shah says it is not right to say so, because, in both kinds of loans, the total interest payout will depend on the loan amount, interest rate and tenure.

According to Narayanan, it is a question of how much capacity people have, how much of their future income they can monetise by way of property and pay instalment over a period of time.

A mortgage guarantee backed home loans is suitable for borrowers whose loan applications were rejected due to reasons such as workplace and profile, credit history, etc, and those who fall in the higher age bracket of 45-55 years, that is who is inching closer to retirement, says Chaudhary.