Innovative loans: Reading through the innovation

Teaser loan – Low fixed interest for first 2-3 years and then floating rate

Interest pay back home loans – a percentage of your interest for specific EMIs is refunded in cash to you

Innovations we could see in the future are

Interest only repayment home loan – you pay only the interest component for a stipulated period.

Equity release home loan – get funded for gaining equity on your house. (Reverse mortgage loan concept)

Innovation,though a great thing,if interpreted wrongly could be disastrous for the prospective home-loan seeker.

So how do we choose from this wide array of home loans?

Although there are many distinctly different innovative home loan products in the market,the answer to the above question lies in the fundamentals of personal finance and most of these answers are applicable to all kinds of loans.

Rule 1: Look at net

cash out flow

Irrespective of the type of loan,the most important factor to be looked at,is,what will be the net outflow from our pockets in terms of interest and other costs. The best way to do this is to draw a hypothetical timetable for the entire home loan period. Tabulate the repayments in terms of month,EMI amount,interest paid,principal paid,charges/refunds and other

costs. These other costs could include charges for making modifications to your repayment,maintaining a savings account with the same bank etc. The value for this can be determined by calculating the opportunity cost of such parked funds. Ask yourself,what if I put the same amount in an investment?

When calculating the charges,clearly look at all types of hypothetical situations like prepayment,daily interest calculation and foreclosure.

Once you are able to determine all the values (approximately),add the total outflow (interest+charges+other costs) and compare this with a similarly created table for a no-frills home loan or any other loan.

Your decision should be based on the fact that,your innovative home loan should give you a savings of at least 10 per cent over the other loan options. The reason for the 10 per cent margin is that most of the future calculations are very hypothetical and hence need a margin of error.

Rule 2: Dont fall for

the buzz words

Most of the innovative products are pushed to the top of the mind by using catchy phrases. Like,in the interest pay back loans,although 50 per cent of interest component is paid for a couple of EMIs,the promotions talk create an instant impression that a customer can get half of his interest back. Textbook marketing stuff! Of course there the strings attached with several conditions that need to be met to become eligible. As a customer we need to be clear in our minds to control our urge and not fall for impressive marketing tactics.

Rule 3: The bigger picture in the small print

Always be sure to read each and every detail of your home loan agreement – especially when taking an innovative product – before signing on the dotted line. Brilliant drafters combined with ultra fine print can make it a boring read and you might end up accepting to terms that might put you in a disadvantageous position later on. Be sure to read and understand everything before you decide to take the loan. At times the facilities you may get for being a buyer of an innovative product may result in loss of other facilities given to no frills loan buyers from the same lender.

Rule 4: There are no free lunches

Every lender is in the business for making his share of business profits. If a product is offered at a discount or with special offers,there is always the chance that it will be collected back in some other form. The most common form is by cross selling other products or incorporating a higher rate of interest during rate revisions. To be sure that your decision is right,always follow rule no 3.

Rule 5: Taxation clarity

Since a major percentage of Indian home loan buyers take a home loan for the sake of saving taxes,we also need to be sure of the tax implications of such innovative offers. Especially in the future! The taxman could come up with multiple complicated queries. Get the answers from your loan provider/auditor before taking the loan.

Rule 6: Never forget rule no 1

Innovationdrives businesses and it should rightly do so. Make informed decisions while buying innovative financial products; else the innovation could become a maze of confusion for you!

Author is CEO,BankBazaar.com