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.
1. 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 number, EMI amount, Interest paid, Principal paid, Charges/Refunds and Other costs. The 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 calculated 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 enter 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% over the "other loan options". The reason for the 10% margin is that most of the future calculations are very hypothetical and hence need a margin of error.
2. Rule 2: Don't 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% 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's the customary asterix hovering around with several conditions that need to be met to become eligible. As a customer we need to be clear in our minds not to control our urge to take a decision based on such good marketing tactics.
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 lines. 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 at 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.
4. There's nothing called as a free lunch
Every lender is in the business for making its 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 be incorporated by offering a higher rate of interest during rate revisions. To be sure that your decision is right, always follow rule no 3
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 tax man could come up with multiple complicated queries. Get the answers from your loan provider/Auditor before taking the loan.
6. Rule 6: Never ever forget rule no 1
Innovation drives 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!
