The British bank promises to refund half the interest component on three EMIs. It’s a first in the home loan business. But does it amount to very much any way?

HSBC India has announced a new home loan package offering to pay back part of the interest to borrowers. Yes, like the foreign bank claims, it is a first in the home loans business. But if one takes a careful look it might not be such a big deal after all.

The scheme which was prominently advertised last week, promises to give back 50% of the interest on the 12th, 24th and 36th EMIs (equated monthly instalments). It reads, "If the interest on your 12th EMI is Rs50,000, you get Rs25,000 paid back to you after you pay the instalment." That does seem quite a large refund. According to figures available, the interest on the 24th EMI would be about Rs48,000 and the refund Rs24,000, while the interest on the 36th EMI would be about Rs47,000 and consequently the borrower would receive a refund of Rs23,500.

This adds up to a hefty refund of Rs72,500. Please note that this kind of refund would be available to borrowers taking a loan of Rs80 lakh. However, for the average home buyer taking a loan in the region of Rs30 lakh, the component of interest refund promised in the three instalments would add up to about Rs27,000 only. Is this such a big deal?

Of course, the first thing that a borrower looks for is the interest rate on the loan. HSBC's rates start at 10.25% on loans up to Rs30 lakh, 10.50% up to Rs75 lakh and 10.75% on loans exceeding Rs75 lakh. These rates are 25 basis points higher than the rates offered by HDFC, the housing finance market leader. But HSBC's rates are on level with State Bank of India's home loan rates.

There is one further condition, whereby a borrower must have a savings/current account with HSBC and maintain a minimum balance of Rs25,000. The bank says it will credit the refund to this account. While, most foreign banks have this minimum balance condition for savings/current accounts, HSBC says that it is willing to waive the minimum balance for home loan borrowers.

HSBC has a constant EMI for the entire loan period, in spite of the fact that some funds are parked in the savings/current account, and there is no compensation on the interest component. Perhaps, the only concession from HSBC is the flat Rs10,000 loan processing fee which is lower than the 0.5% on loan amount charged commonly by home finance companies.

HSBC also has a higher prepayment charge of 3% (against the industry average of 2%) when more than 25% of the loan amount is prepaid in one go.

HSBC will not finance under construction properties through this scheme and any new property must be ready for occupation at the time of the disbursal of the loan. The bank also allows loans under this scheme for existing properties as well. The special offer is valid on floating rate home loans, but it is not valid on Smart Home and SmartLAP schemes of the bank.

It is unclear whether the refund amount will be liable for income tax. And finally, the offer is valid only till 31 July 2011. So why is HSBC in such a hurry to pick up customers in this two months period? Perhaps, there lies the answer to this innovation.