Banks charge anywhere between 0.5 and 1 per cent over the normal home loan rates, so calculate the probable overall savings before going for home saver loans.
Pre-payment of home loan is a double-edged sword. It reduces the future obligation but incurs opportunity cost and risk in case of an emergency where you urgently need cash. This is where home saver loans help.
WHAT THEY ARE
In this type of home loan, the lending bank links your home loan account with a current or savings account in the same bank.
While calculating the monthly interest on your home loan, the bank deducts the funds in the current account from the principal outstanding and then levies the interest.
This scheme is quite useful for a borrower who has a sufficiently large balance in his account, which he wishes to utilise when in need, and also for a business owner who can park excess funds in his current account.
The concept, though simple, is powerful. The idea is to make use of your deposit in your current or savings account to offset a part of the principal. Once some of the principal is offset, interest obligation comes down.
For example, you think of making a prepayment of Rs 5 lakh. Instead, deposit that amount in a savings account which is linked to your home saver account.
Then, the interest obligation would be calculated on the loan outstanding less Rs 5 lakh, and not on the entire loan outstanding. What’s more, you can withdraw this money or a part of it whenever you want.
Such savings can be quite huge when you consider the fact that EMIs will have to be paid for several years more.
What if you do not have Rs 5 lakh in your savings account?
In that case, even when you deposit a recurring amount in your account, this deposit will still be subtracted from principal outstanding to calculate the EMI.
The savings would be less in initial months but will compound in the later part of the tenure.
SOME CAVEATS
While certainly an innovative product, it has its own pitfalls. First, keeping money in saving or current account is not profitable. Investors would rather invest in avenues such as mutual funds which can give better returns.
Second, home saver loans are given at a higher rate than a normal home loan. Banks typically charge anywhere between 0.5 and 1 per cent over the normal home loan rates. For example, for a loan amount up to Rs 25 lakh, IDBI charges 10.5 per cent floating rate of interest on a normal home loan. The same is 11.5 per cent on home saver home loan. Calculate the probable overall savings before going in for such loans. Moreover, home saver loans are currently not offered by all banks. A few banks that do are Citibank, Standard Chartered, IDBI, HSBC, ICICI, and SBI. Borrowers should also check eligibility as criteria for home saver loans vary.
Finally, this option is relatively better only when you have enough money to park in the linked account. Also, always take time to discuss with the bank and understand how the calculations are done to ensure you have a transparent understanding of any additional interest costs that might be incurred.
(The author is CEO, BankBazaar.com)
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