Cushion of credit line may work to your advantage

Close on the heels of its peers introducing hybrid housing loan schemes, Citibank has jumped on to the bandwagon by launching CitiHome One, a mortgage product that is a combination of a conventional term loan and a credit line. The facility allows borrowers to determine the amount they wish to take as credit line, and the balance will be structured as a simple term loan. However, the credit line will be subject to an overall limit of 30% of the total facility, or Rs 1 crore, whichever is lower.

Let’s take an example of an individual who is buying a house worth Rs 50 lakh. He puts in Rs 10 lakh and applies for a home loan of Rs 40 lakh. In an ordinary loan, he would have to pay an EMI of around Rs 36,000 from the first month onwards (assuming an interest rate of 9% for 20 years). Here, he will have the flexibility to structure his home loan — up to a maximum of 30% — as a credit line where he needs to pay monthly interest. If he avails of a loan of Rs 40 lakh, structured as a credit line of Rs 12 lakh and a term loan of Rs 28 lakh, he pays an EMI of nearly Rs 25,000 (assuming similar interest rate and tenure) on the term portion of the loan and a monthly interest of Rs 9,500 on the credit line. Later, he can deposit any surplus funds into the credit line to save on interest (and pre-payment charges) and has the flexibility to withdraw this money in the future. For instance, if he deposits Rs 2 lakh in the credit line, he saves an interest of Rs 1,600 every month.

A maximum of Rs 5 crore is allowed to be borrowed under the loan facility. The loan will be subject to a variable interest rate linked to the Citibank Mortgage Prime Lending Rate, which currently stands at 13.5% per annum. The loan tenure of the term loan component can go up to 20 years while the credit line is subject to a maximum tenure of 10 years, post which, the borrowers have the option of either making a one-time repayment, or converting the credit line into a term loan and paying back the amount in EMIs.

In addition, upon availing of this scheme, the borrowers will be enrolled into the bank’s ‘feature-rich’ current account. This will serve as an umbrella account and will allow borrowers to consolidate all their banking requirements into a single CitiHome One Account. However, the cushion of credit line may not be a great idea for those who find it difficult to resist the temptation of utilising credit that is easily available for a 10-year period. Besides, the loan is offered under a floating rate structure, and considering that interest rates are expected to harden in the coming months, it acts as a drawback, particularly when compared to some other banks that are competing to offer fixed interest rate as low as 8-8.25% in the initial years.