Flexi Home Loans, also known as “Step-up Home Loans”, are unique type of home loan where banks and financial institutions decide the eligible income for the loan based on the future growth aspects.
Apart from it, the borrower start paying the home loan EMIs right after the loan is disbursed unlike the regular home loan in which EMIs start only after moratorium period is served.
However, it is important to understand what kind of interest rate is linked to your home loan. A flexi home loan availed at fixed rate of interest is more likely to be a safe option than a flexi home loan availed at floating rate of interest. The borrower must understand the home loan offer being provided by the bank since some borrowers gradually increase the EMI amount after a certain period have passed whereas some only increase the EMIs after the initially period only.
When it comes to Flexi Home Loans, it works differently than a traditional home loan and due to this the banks/FIs calculates the income of the borrower in a different way as compared to regular home loans. In Flexi Home Loans, the net income is considered just as a regular home loan, but banks/FIs also consider the continuous growth in income the borrower have been receiving. After checking the previous growth in income, the banks/FIs makes an assumption of how much the current income will likely to grow in the upcoming years and decides how much loan amount should be offered to the borrower.
It have two types of interest EMI, Pre-EMIs/Pre-Interest EMIs and regular EMIs. The Pre-EMI mainly consists of the interest component applicable on the actual principal loan amount, till the time moratorium period continuous from the date of loan sanction where the moratorium period can be 3 to 5 years long. On the other hand, the regular EMIs starts when the moratorium period ends, and consists of both, interest component as well as principal component.
So, during the moratorium period, the borrower either pays only the interest on the total principal outstanding or the major part of the EMIs goes towards the interest rate and once the moratorium period ends, the borrower pays the moderated EMIs including interest and principal component. Hence, the banks/FIs seems comfortable to offer increased loan amount above the current repayment capability of the borrower since they start receiving the interest on home loan right after the sanction.
Due to the nature of income assessment used for Flexi Home loans, the banks and financial institution seems agreeable to the fact of higher income the borrower likely to have in future. Moreover, since they start receiving the interest from the start, the banks/FIs tends to lend out more than usual.
Since, the Pre-EMIs mainly consists the interest component against the principal outstanding, it tends to be lower than the moderated EMIs which starts after completing moratorium period. Hence, it is quite easy to cover monthly installments for the loan during the time of moratorium period.
Since, the EMIs paid during the initial period of the loan, go mainly towards the interest component applicable on the principal loan outstanding, the borrower can earn higher tax benefits against the EMIs paid for the home loans, as compared to the regular home loans.
Unlike regular home loans in which banks and financial consider the maximum age of the borrowers to be 60 to 65 at the time of loan application, the flexi loans have a drawback since the financial institutions limits the maximum age to apply for a flexi loans to be 45 to 50 Years where the loan amount must be repaid till the age of the borrower is 70 to 75 years.
The flexi loans have a major drawbacks that the total cost of the home loan is usually higher than the regular home loans. Since the borrower can start to repay the principal loan outstanding only after the moratorium period ends, the Pre-EMIs are settled against the interest only. Hence, the principal loan outstanding remains the same until the moderated EMIs starts. Due to this, the overall cost of the home loan increase around upto 20% than the regular home loans. Whereas, it can be more costly if it is linked to Floating Rate of Interest.
The monthly EMIs which starts after completing the moratorium period, are higher than the Pre-EMIs since it consists both the applicable interest as well as the principal outstanding component which remains the same till the time.
The flexi home loans are most suitable for a government employees, than a non-government employees since the pay scale of a government employee usually tends to go upwards after a specific time period. Moreover, their jobs are more likely to be secured than the employees working in a private organizations. Hence, flexi loans can be good option for a government employee who is looking for high loan eligibility.
Apart from government employees, flexi home loans are also most suitable for a salaried professional who have just started his/her career and wants to avail the funds to built his/her own home but unable to afford due to the current pay scale or lower home loan eligibility. These kind of borrowers are more likely to have not only a stable job but expected growth as well, compared to any self-employed businessman or any employees working in private organisations.
Since, the initial EMIs are lower than the later on, availing a flexi home loan is quite easy. However, a borrower must understand how it works before availing it, especially if he/she is borrowing home loan for the first time. Due to the moderated EMIs after the moratorium period, the borrower will end up paying higher amount towards the home loan as compared to a borrower who have availed a regular home loan and more likely to save a higher amount if his/her pay scale increase after a certain period.
It limits your eligible income to avail more funds from a bank or financial institution, which results in low FOIR. Hence, the borrower may end up in complex situations, especially in there’s any emergency arises.