The Standard Chartered Bank has launched the ‘Interest Only Home Loan’ in which borrowers will pay just the interest amount for an ‘interest only’ period of up to 36 months.

What is the Interest Only Home Loan?

In an interest-only home loan, the borrower pays only the interest amount 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 till maturity.

Advantages 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 extra cash savings that they may use for investing to get higher returns.

There is flexibility offered in an interest-only loan, borrowers have an option to commence the full EMI payment earlier.

Disadvantages of an Interest Only Home Loan

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

What’s the catch?

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

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

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

Should you go for it?

Borrowers should go for this only if their financial needs demand it. According to Live Mint, as interest rates are low currently, it will be better to repay the loan and bring down the outstanding liability, 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 primary obligation is to serve only the interest.

(Edited by : Thomas Abraham)