Housing Loan Interest Saved Scheme...!

Thirty seven (37) year-old Mr. Sunil Nadkarni is facing a dilemma common to many a housing loan borrower. He is wondering whether to prepay &  save interest on the housing loan or /  keep the money for a rainy day.

The urge to prepay at least a part of the principal is strong. In 2006, the Mumbai-based banking executive was paying an EMI of  Rs. 6,134 at an interest rate of 7.5 per cent. With the rate jumping to 12 per cent, Mr. Suni Nadkarnis monthly mortgage payment has shot up to Rs. 8,400, and his home loan tenure is now 45 years from the initial 25 years .

Home Saver Loan..!

At the same time, he is worried about the liquidity crunch he might face should any contingencies crop up soon after deploying his funds. Perhaps he does not really have to make a choice. For all those wanting to have their cake & eat it too,banks offer a product called home saver loan.

Whats a home saver loan?

This facility allows the borrower to deposit his / her excess savings in a current account linked to his/her housing loan account. While calculating the interest component, the bank deducts the balance in the current account from the borrowers outstanding principal.

Typically, the average monthly balance in the account is considered for this purpose. Meanwhile, the money can be easily withdrawn in case of an emergency.The only drawback is that banks charge about 0.5 to 1 per cent more than the rate on regular housing loans.

At present,this facility is being offered by leading players such as the

IDBI Bank

Citibank,

SBI,

Standard Chartered Bank

and HSBC.

How does it work?

Assume that you need a housing loan of  Rs. 25 lakh. At an interest rate of 10.5 % for a 20 year tenure, the EMI (Equated Monthly Instalment ) for the plain vanilla housing loan works out to Rs. 24,960. In the first month,the interest portion is Rs. 21,875,while the balance Rs.3,085 , goes towards principal repayment, leaving Rs. 24.96 lakh as the outstanding loan.

The second months interest will be calculated on this amount,and so on for the next 238 months.

On the other hand, if you were to opt for a home saver loan, the higher interest rate of 11 % would initially translate to an EMI of Rs. 25,805. Now, suppose you receive Rs. 5 lakh as your annual bonus, which you deposit in the linked current account.

In this case, your interest obligation would be calculated on just Rs. 20 lakh. Not only does your loan tenure come down to 136 months (a little over eight-and-a-half years), you also save Rs. 19.69 lakh on interest (see table).

What are the benefits?

The money in the linked current account not only helps reduce your interest burden, while remaining easily accessible, but is also safe from the taxman. Moreover, though this balance is treated as part payment, the bank does not impose any prepayment penalty for the same.

Even if you do not foresee a windfall coming your way, you can choose to avail of this product by simply depositing a recurring amount in your current account,say, a part of your salary, and watch the power of compounding work its magic.

Who can make the most of it?

Mr. Pankaaj Maalde, Head (Financial planning) ApnaPaisa.com, the financial services portal said, ''The home saver loan suits everybody. Since it is advisable to maintain about 6 months worth of household expenses as a contingencies corpus, people can park this amount in the linked current account and acquire dual benefit. The contingency fund could range from Rs. 3 to Rs.10 lakh, especially in households with dependent parents. We also include medical contingencies in this kitty, says Mr. Maalde. Imagine the amount you could shave off your outstanding principal with this corpus parked in a current account linked to a home saver loan account.

What are the disadvantages?

Home saver loans are more expensive than regular housing loans. That is the interest is high about 1%.

 Secondly, the deposit in the current account does not generate any interest income. If you were to invest this money in mutual funds or / equity, you had earn much higher returns. So, this option is primarily for those for whom liquidity is a concern.

As with any financial product, the rule of thumb is to shop carefully for the best deal since interest rates differ from bank to bank. But be aware that the eligibility criteria will also vary. For instance, Citibank Home Credit requires a salaried individual to have a minimum gross annual income of Rs. 1 lakh and at least 2 years of work experience to be eligible for this product.

However, for Standard Chartereds home saver loan, the threshold is Rs. 2.76 lakh per annum.

Mr. V.N Kulkarni, Chief counsellor, Abhay Credit Counseling Centre, said,''A borrower must take the time to understand the math for home saver loans and the various charges involved before rushing to buy this product.Some calculations might be a bit confusing, so do not be hasty, he cautions.

Savings on  interest Rate..!     

Particulars       Reqular housing Loan  Home saver loan

Loan Amount          Rs. 25 lakh                  Rs. 25 lakh

Interest                  10.5%                                  11%

EMI                        Rs. 24,960                        Rs. 25,805

Loan Tenure

Months                     240                                    240

Average Deposit

in Current account     ----                                Rs. 5 lakh

Toatal Interest

paid                          Rs. 34,90,300                 Rs.15,20,900

Actual Repayment 

period (Months)          240                                 136

Tenure reduced

(Months)                     -----                                 104

Savings on

interest                   ---                             Rs. 19,69,400  

Src: ET by AMIT SHANBAUG

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