The home loan amount that borrowers can get under this scheme ranges from Rs 35 lakh to Rs 3.5 crore. The maximum tenure of the home loan that can be taken by a salaried person is 30 years while for a self-employed borrower, it is 25 years. In Bengaluru, the interest-only home loan is being offered to only salaried borrowers.

Now, before you log in to the bank's website to apply for this loan, do note that there is a catch. As per the bank's website, "Interest only period (applicable for 'interest only home loan') means a period of 12, 24 or 36 months chosen by the borrower and mentioned in the Facility/Sanction Letter and in the loan agreement during which period only interest is payable on the loan amount." Once the principal repayment holiday is over you will have to start paying the regular EMI amount that will include the principal repayment amount.
 

Who can benefit from this ' interest-only home loan'?

The bank intends to help borrowers who wish to acquire a property at current low prices but are short of cash and unable to make the full EMI payment during the initial years. A lower monthly repayment during initial years will result in cash savings for such borrowers and hence, it will enhance their affordability. More cash in hand can also be utilized for home improvement, renovations, personal needs and more.

"It provides an alternative to our clients who wish to take advantage of the prevailing conditions and reduce their EMI burden for the initial tenure of their loan," said Jinesh Shah, Head - Mortgages and Retail Loan against Property, Standard Chartered Bank, India.

Many people may be expecting enhanced income later or have a good amount of funds locked in investments, which is due to get unlocked in coming years and would like to take advantage of a good deal currently being offered on a property purchase. For them, a home loan like this will help them acquire a property at a lower monthly expense, i.e., lower EMIs.

Should you go for an 'interest-only home loan'?

There is nothing new about this loan in terms of concept as a flexibility of similar nature is already there in the form of overdraft home loans where you just have to service the interest part and repay the principal as per your convenience. You can get such a home loan overdraft called 'SBI - Maxgain' Home Loans from SBI where your primary obligation is to service only the interest. Many other lenders too offer such an overdraft facility for their home loans.

When compared to an overdraft home loan the ' interest-only home loan' allows interest-only payment for a limited period only. Moreover, unlike an overdraft home loan, the borrower of an interest-only home loan is not allowed to withdraw funds as per requirement.

However, you need to keep in mind that overdraft home loans usually come with a higher interest rate compared to a regular term loan. For instance, SBI charges a 0.35% higher interest rate on its overdraft home loan 'Maxgain', compared to what it would charge a regular term loan for a salaried borrower. So, it is likely that the interest rate offered on 'interest-only home loan' could be higher than the corresponding term loan.

"Standard Chartered Bank offers similar rates for Term loan / OD loans. Our existing rate of interest is quite competitive and in line with the current market rates, the IOHL (Interest Only Home Loan) starts at 6.99%," says Shah. Though the bank claims to offer similar interest rates on IOHL, however, it has not shared the details of comparative interest rates, therefore borrowers need to check this while availing of the loan.

Moreover, the interest-free period that you get on the 'interest-only home loan' is just an extension of your home loan tenure. So, if you are taking a 3-year interest-only initial payment period and want a subsequent repayment tenure of 15 years then your final tenure will increase to 18 years. Longer tenure means a higher amount of total interest will be paid towards the loan.

Let us understand this with an example. The first option you have is going for a Rs 40 lakh home loan for a tenure of 15 years at a 7% interest rate and the second option is to have 3 years interest-only period with an interest rate of 7.5% and a total tenure of 18 years. By going for the second option, you will end up paying additional interest of Rs 11.10 lakh than the first one. Even when the interest rate is similar you will end up paying Rs 8.4 lakh additional interest for 3 years interest-only period.

It is always advisable to keep the repayment tenure as short as possible to keep the interest cost low. Unless there is a very compelling deal on your property purchase, going for such a loan will mean you lose out on interest payments. It makes sense for you to do a net benefit analysis before going ahead with such a loan. However, if you have found a very attractive deal where the benefit outweighs the enhanced cost, you may consider having such a loan.