What is that? Advantages and disadvantages

Standard Chartered Bank has launched the “interest only home loan” in which borrowers will only pay the interest amount for an “interest only” period of up to 36 months.

What is an Interest Only Home Loan?

In an interest-only home loan, the borrower pays only the amount of interest for the initial period specified by the bank. After the “interest only period” ends, the borrower pays the full EMI, including the principal amount and interest until maturity.

Benefits of an Interest-Only Home Loan

The advantage of interest only home loans will be the low monthly payments during the interest only period. Borrowers will have additional savings that they can use to invest for higher returns.

There is flexibility offered in an interest only loan, borrowers have the option to start paying the EMI in full sooner.

Disadvantages of an Interest Only Home Loan

Since there is no repayment of principal in the interest-only period, the tax deduction under Section 80C of the Income Tax Act is not available during the period. . Additionally, there may be a payment shock when the initial interest-only period ends for borrowers.

It is true that repayment of installments is low during the interest-only period, but the overall loan burden increases with these products.

According to a Times Now report, for example, in a regular home loan of Rs 50 lakh at an interest rate of 8% for 30 years, the total amount payable in a regular loan will be Rs 1.32 crore while in an interest only loan the total amount will be Rs 1.34 crore.

The comparison is for educational purposes only and the actual result may differ from case to case. However, the underlying principle of an increased payment will remain the same.

Borrowers should opt for this only if their financial needs require it. According to Live Mint, since interest rates are currently low, it will be better to repay the loan and reduce the outstanding debt, provided the borrower can pay the EMI, including the principal amount.

Other banks offer similar services under different home loan products such as SBI’s Flexipay and a home loan overdraft called ‘SBI Maxgain’ where your main obligation is to pay interest only.

(Edited by : Thomas Abraham)

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