Home Saver Loans: An Option Worth Exploring

We all are quite familiar with a regular home loan account, wherein the borrower pays EMIs every month, comprising interest and principal amount, for the entire loan duration. Here, a borrower may pre-pay a loan, but once pre-paid, he will not be able to withdraw that amount in times of need. But how about a loan account, in which you can deposit whenever you have surplus to not pay interest on that amount; and can also withdraw the same in times of need. In this case, the interest will be calculated on the original loan amount. In other words, a home saver home loan account has characteristics similar to your savings account, which allowing you to deposit or withdraw money at will, and help you pay your home loan faster, with lesser interest outgo.   

Home Saver Loans: An option

Also known as ‘Offset Loans’ in western countries, home saver home loans allows you to park your excess savings in a current account, linked with your home loan account. Under this, the balance in your current account gets deducted from principal outstanding of the loan for the calculation of interest. Hence, you will end up paying lesser interest. Here, banks usually calculate an average monthly balance.  

The underline hypothesis is that deposit is treated as part-prepayment of loan for the period it is lying in account, without any pre-payment charges.

How it works?

Let’s assume that a person has taken normal home loan of Rs 25 lakh at 8.5 per cent interest for 20 year duration. The monthly installment will work out to around Rs. 21,696. Of this in the first month the interest portion is Rs. 18,750 and the balance Rs. 3,743 goes toward principal re-payment, leaving Rs 24,96,257 as the loan outstanding at the end of the first month. The next month’s interest will be calculated on remaining loan amount, i.e., Rs 24,96,257. Let’s compare this scenario with home saver home loan account, with a deposit of Rs 6,000 per month, in addition to your loan EMI.

Regular Home Loan Vs. Home Saver Loans

Here, we have taken a difference in the interest rate of normal home loan and home saver home loan as home saver home loan comes at slightly higher interest rate.

Hence the home saver home loan is much more cost effective than regular home loan. In the example above, it not only saves you from interest amount of Rs 10,95,852, but also reduce the tenure by 97 months.

Further, tax advantages are much higher in case of home savers loans as in any other scenario, deposits will be taxable but not anymore in the case of home saver home loans. Here, it not only saves interest but also helps in reducing the interest component of the loan and hence reducing the total loan outflow.

Unfortunately, not many banks in India today offer these home saver home loans. Amongst those available, Standard Chartered’s Home Saver, IDBI Home Saver home loan, HSBC’s Smart Loan, Citibank Home Credit and SBI’s MaxGain are few notable products. Loans are available to general customers with no differentiated criteria. However, the basic eligibility requirements differ to a large extent.

For instance, Citibank Home Credit specifies that a salaried individuals need to have a minimum gross annual income of Rs 1,00,000, minimum age of 25 years and at least 2 years of work experience. Similarly, StanChart requires a minimum gross salary of Rs 23,000 per month, if someone seeks a loan of Rs 10 Lakhs. Documentation requirement is more or less same as in regular home loans. Apart from the regular scheme, the bank has launched HomeSaver Plus that allows you to link up to three accounts (both savings and current) to the home loan. The borrower can even link accounts belonging to his family members.

However, there is catch as interest rates in home saver home loans are extra by around 0.25-0.75% per annum as compared to regular floating rate loan. For example, IDBI interest saver loan at present is available at 11.75% as compared to 11% for regular floating rate home loan. Similarly, Citibank Home Credit scheme is available at 0.5% rate higher than the regular home loan interest rate.  

Conclusion

The Home saver loans are anytime advisable to customers as despite the higher interest rates, it results in significant cost advantage over the period of 10-15 years. Moreover, there are no charges attached with the account and hence, one can easily park excess funds in the current account, linked with the loan.