Victor has taken a home loan of around 25 lakhs. He is regularly paying the EMI. Despite interest rate increases and rising inflation, Victor never defaulted. His savings reduced drastically because of increase in EMI. On top of that he had paid off a lump sum amount of Rs.5L as part of his prepayment to help him ease off the strain on his monthly budget with the consecutive hikes that happened the previous year. However, it was all going well till Victor had to spend 3 lakhs for an emergency. He had to run from pillar to post, ask friends & families, and talk to banks. Finally he was able to arrange for funds but it was a very stressful time for him!
This is not a very uncommon situation. Many of the borrowers can easily identify with such situations where pre-payment of loan puts extra burden on them because it took all their savings leaving them exposed to any emergency situation. Pre-payment of your home loan is a double edged sword. It reduces the future obligation but incurs opportunity cost and more risk in case of emergency situations.
Home Saver Loans
What if there is option where loan borrowers can pay more (just like in case of pre-payment) when they have surplus fund and withdraw from the same fund when they face emergency situations like what Victor faced. What if there is an option where loan borrowers are saved from further ignominy of running pillar to post to arrange emergency expenses.
Home saver loan is one such option that not only allows home loan borrowers to pay more from their surplus money but also lets them withdraw from the same pool if they need it in emergency cases. How it works
The concept, though simple, is very powerful. The idea is to make use of your deposit in current or savings account to offset some part of the principal. Once a part of the principal is offset, your interest obligation comes down. Let’s understand this with the same example.
Suppose Victor, instead of paying 5 lakhs as prepayment, would have deposited 5 lakhs in his current or savings account which was linked to his home saver account and left it. His interest obligation would have been calculated not on the loan outstanding but on the loan outstanding minus 5 lakhs. What’s more? Victor can withdraw this money or a part of it whenever he wants it. Let’s see how this works by an example.
|Example of savings using Home Savers option ||Case 1 ||Case 2 |
|Amount outstanding || 2,000,000.00 ||2,000,000.00 |
|Interest rate charged ||8% ||8% |
|EMI ||16,728.00 ||16,728.00 |
|Deposit in current account linked to home savers account ||- ||500,000.00 |
|Interest to be calculated on || 2,000,000.00 || 1,500,000.00 |
|Interest obligation || 13,333.33 || 10,000.00 |
|Principal paid || 3,394.67 || 6,728.00 |
|Remaining principal to be paid || 1,996,605.33 || 1,993,272.00 |
It can be clearly seen that the borrower has saved more than Rs 3,000 in the first month itself. This saving can be humongous if you consider the fact that you have to pay the EMI for next several years. What if you do not have Rs 5 lakhs in your current/savings account? In that case, even when you deposit a recurring amount in your account, this deposit will 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. Home savers accounts will not only help borrowers save on payment but will also reduce the tenure of EMI as principal will reduce with every passing month. Caution points
This is certainly a good innovative loan product but it has its own pitfalls. First, keeping money in saving or current account is not profitable. Investors would rather start SIP in mutual funds, which can give better returns. While liquidity is an issue in case of mutual funds relative to savings or current account, this is manageable as redemption of mutual funds can happen in few days.
Second, home saver loan are given at a higher rate than normal home loan. Banks typically charge anywhere between 0.5% to 1% higher rates than normal home loan. For example, for loan amount up to 25 lakhs, IDBI charges 10.5% floating rate of interest on normal home loan while the same is 11.5% on home saver home loan. Despite the higher rate, the overall savings is tremendous.
Finally, this option is relatively better only when you have enough money to park in the linked account. Moreover, home saver loan is not offered by all the banks as of now. Few banks that offer are Citibank, standard chartered, IDBI, HSBC, ICICI, and SBI. The rates vary with banks. Borrowers should also look at the criteria for eligibility as this is different from normal home loan where banks have similar criteria. Hence, if you do not get home saver loan from one bank, you should try in another.
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