Sep 202016
 

Home Saver Loan

You must have heard of Home Saver Loan, didn’t you? In case you haven’t, do not worry! This article will give you the necessary guidance to you.

Before we start defining home saver loan, let us look at these two scenarios:

  1. You buy a house using a home loan.
  2. At some point, you get a bulk of money either in form of arrears payment, bonus payment or as some kind of inheritance.

What will you do? Will you use the bulk money to pay off your home loan or will you use it to invest somewhere and earn interest?

Home Saver Loan

You definitely face a dilemma that is not easy to solve. What should you do? This is where the Home Saver Loan pitches in as a savior.

What it does is that it will allow you to ‘PARK’ the lump sum money you get into your home loan account. It will work as your personal piggy bank. If you need the money, you just withdraw it whenever you want.

When we say PARK, we mean that you only keep the money in your home loan account. You are not actually paying off the home loan. The money remains at your disposal, enabling you to withdraw when needed.

The bright side? When you park your money in your home loan account, the charged interest on your home loan falls significantly. So, the interest you pay towards your home loan will now be lower, allowing you the flexibility of repaying your total loan sooner.

Okay, we agree that the above explanation hasn’t been robust enough to give you a very clear picture. That’s why, keep reading…

What On Earth Is Home Saver Loan?

Let us keep this simple. In this type of loan, you will get a current account. The extra money you will get will be deposited in the current account. The current account in turn will be linked to your loan account.

Remember these:

  1. The money you keep in your current account will not earn interest.
  2. The money you keep in your current account will be deducted from the actual loan balance to calculate the interest rate. Explanation? You take a loan of say 50 lakhs. You deposit 10 lakhs in the current account. Instead of interest being calculated on 50 lakhs, interest will be calculated on (50 lakhs – 10 lakhs) = 40 lakhs.
  3. The money you deposit in the current account can be withdrawn when needed.
  4. There will be a limit to how much can be withdrawn from the current account balance.
  5. You can redeposit money back into the current account.
  6. The average balance in the current account in any given month will be used for interest calculation on your home loan.

Also remember:

  1. A more general term for home saver loan is, ‘offset loan’.
  2. You actually earn interest on your current account deposits but that is not given to you. The bank keeps it and deducts it from the interest you need to pay for your home loan.
  3. Offset loans have higher interest rates than vanilla or regular home loans. Usually offset home loans have 0.5% to 1% additional interest. For example, if a normal home loan has an interest of say 11%, an offset loan will have an interest of either 11.5% or 12%.
  4. This product is not available with all banks. It is available with a handful of banks. Below is the list of banks and their respective offset loans:
Bank Name Name of Offset Loan
State Bank of India MaxGain
Citibank Home Credit
Standard Chartered Bank HomeSaver
HSBC Smart Home
IDBI Home Loan Interest Saver
Bank of Baroda Home Loan Advantage
Union Bank Smart Save

If you are looking forward to purchasing a smart loan or an offset loan, you have to select any one of the aforementioned banks. There are no other alternatives available in market.

Modus Operandi of Home Saver Loan

Here is a big question. How does a home saver loan or an offset loan or a smart loan operate? Actually, there isn’t much of a difference between vanilla home loan and an offset loan. Except for a few extras, the structure of a smart loan remains more or less same as that of a vanilla home loan.

You will:

  1. Pay EMI (Equated Monthly Instalments) in both smart loan and vanilla loan.
  2. EMIs for both vanilla home loan and smart loan will cover both interest payment and payment towards principal amount you take as loan.
  3. Both vanilla home loan and smart home loan will have a repayment tenure but there will be a difference.

The extras you get with smart home loan will include:

  • A current account that the bank will link to the loan account you have with the bank.
  • The extra money you deposit will only offset some interest payment and reduce the effective EMI and the loan tenure.

Basically when you purchase a home saver loan:

  • You will deposit money, which will be more like prepayment of your loan minus the prepayment penalty.
  • You will enjoy flexibility of withdrawing the money in your current account and you can then redeposit the money.

It is a very simple concept in principle but there is some crude math behind it. You need to understand clearly that the smart loan is really effective when you actually deposit a major amount of money in your current account. If you deposit peanuts, you will barely enjoy the true benefits.

Numerical Examples of Home Saver Loan

Case 1 – You Don’t Withdraw from Your Current Account

Let us assume:

  1. You took a home loan of 25 lakhs. You took a vanilla loan.
  2. The applicable interest on your smart loan is 10.5%
  3. You have a loan tenure of 20 years.

With the above assumptions and (also skipping the actually calculations), the EMI will stand at INR 24,959 for the first month. This amount breaks down as:

EMI = Interest towards loan + Payment towards principal = INR 21,875 + INR 3,084 = INR 24,959.

Once you pay the first instalment, your outstanding loan amount will now stand at:

INR 25,00,000 – INR 24,959 = INR 24.96 lakhs.

The next instalment will not be calculated on these INR 24.96 lakhs. After the second instalment payment, the outstanding amount will go down further and the next instalment will be calculated on that amount… this will continue. For how long? For 238 months until you pay the whole amount back.

But that was vanilla home loan. What about home saver loan? Let us now take that example.

  1. You took a home loan of 25 lakhs. You took a smart loan.
  2. The applicable interest on this loan is 11%.
  3. The loan tenure is 20 years.

With these assumptions, the first instalment will stand at INR 25,805.

Now assume that you get 5 lakhs bonus. You deposit the money to the current account. Instead of calculating EMI on 25 lakhs, the bank will now calculate it one INR 25 lakhs – INR 5 lakhs = INR 20 lakhs.

What will happen here is that not only your EMI fall because your total interest will go down, your tenure will also now come down to 136 months instead of 238 months. At the end of the tenure, you will end up saving INR 19.69 lakhs that you would have otherwise given away to bank in form of interest payment. You actually don’t need to pay this much interest now. You benefit from it.

Times of India give a nice chart on this explaining the same thing in a tabular format. In case you want to see the colorful chart, head over to this link or you can simply see the plain table here:

Particulars Vanilla Home Loan Home Saver Loan
Loan amount INR 25 lakhs INR 25 lakhs
Interest 10.5% 11%
EMI INR 24,959 INR 25,804.70
Loan tenure 240 months 240 months
Average deposit in current account NIL INR 5 lakhs
Total interest paid INR 34,90,298 INR 15,20,897
Actual repayment period 240 136
Reduced tenure NIL 104 months
Savings on interest payment NIL INR 19,69,401

That’s quite a lot of savings. Don’t you think so?

That was an example where you didn’t withdraw money from your current account. What about the case where you withdraw? Before show that example, you need to remember that:

  1. You have the freedom to redeposit in your current account.
  2. The average balance in your current account will be debited from the loan amount.

Now let us take a look at the numerical example.

Case 2: You Withdraw from Your Current Account

  1. You took a smart home loan of INR 10 lakhs.
  2. You and bank finalize on the interest of 10%.
  3. You take a tenure of 240 months.
  4. The loan is disbursed on April 1.
  5. You deposit INR 20k on April 11.
  6. You deposit INR 50k on April 21.
  7. You withdraw INR 45k on May 1.
  8. You deposit INR 30k on May 11.
  9. You deposit INR 15k on May 21.

Now, if we take the simple case of vanilla home loan, you will have the following figures:

  1. Monthly instalment = INR 9,650
  2. Interest part in EMI = INR 8,219
  3. Payment for principal = INR 1,431

But…

Since you opted for smart loan, here is what happens:

  • For first 10 days, the loan amount will be INR 10,00,000.
  • For next 10 days, the loan amount will be INR 9,80,000.
  • For the final 10 days, the loan amount will be INR 9,30,ooo.

The average of these there is 9,70,000. Though this can be arrived with simple average calculation, the bank will actually use weighted average in the following manner:

[(10,00,000 x 10) + (9,80,000 x 10) + (9,30,000 x 10)] ÷ 30 = 9,70,000

This is the amount on which the EMI for the first 30 days will be calculated. The EMI will be INR 9,650 of which, INR 7,970 will be the interest and INR 1,680 will be paid for the repayment of the principal amount.

Once the first EMI is paid off, the remaining outstanding will be INR (9,70,000 – 9,650) = INR 9,60,350.

Since you redeposit in May again, the weighted average will be calculated once more and then the EMI on that average will be calculated.

Clearly, you pay more towards the actual principal amount in this example. This means that you will pay off the loan quicker than the vanilla home loan.

Another Big Question: Who Benefits from Home Saver Loan?

Got a mirror? See the winner! You see, what really happens is that you save a lot of money that you would have otherwise paid to the bank in form of interest. This can be in tune of lakhs of rupees. So, you are clearly the winner.

A simple chart below will help you understand why you turn out to be winner:

Loan Amount: INR 50 Lakhs
Particulars Vanilla Home Loan Home Saver Loan
Case I Case II Case III
Interest Rate 11 % 11.50 % 11.50 % 11.5o %
Equated Monthly Instalments * INR 51,609 INR 53,321 INR 53,321 INR 53,321
Current Account Deposit ** NA INR 2 lakhs INR 5 lakhs INR 10 lakhs
Tenure *** 20 years 18 years and 8 months 15 years and 11 months 13 years
Interest Will Be Calculated On INR 50 lakhs INR 48 lakhs INR 45 lakhs INR 40 lakhs
Interest Obligation for Full Tenure INR 73.86 lakhs INR 69.44 lakhs INR 51.84 lakhs INR 33.18 lakhs
Interest saved NIL INR 4.42 lakhs INR 22.02 lakhs INR 40.68 lakhs
Assumption Money deposited in current account is not withdrawn
* In case there are no funds present in the current account
** Current account is linked to the home save loan
*** Tenure is calculated depending on the outstanding principal

It is very clear that the person taking out a smart loan will be better off than the person taking out a vanilla home loan. However, the bigger the surplus money amount deposited in current account, the bigger is the benefit. Go reverse and you will see that smaller the amount you deposit in the current account linked to an offset loan, the smaller is the benefit. So, if you are putting only a few thousand rupees in your current account, it is not really a good thing. You won’t see much difference between vanilla and offset home loans.

Overdraft Facility

You will often come across the term overdraft facility. It is associated with home saver loan but pretty much works like a credit card. Or, you can say that it works like the facility you find in current account.

Hopefully you already know how credit cards work. Still, here is a recap. In a credit card, you will have a credit limit. This limit is sanctioned by the bank. You cannot use more than that limit. Suppose your credit limit is INR 50,000. You cannot spend more than INR 50,000. Now you use your credit card and spend INR 10,000. You intend to pay back after 20 days. So, you use INR 10,000 for 20 days. You will have to pay interest only on INR 10,000 for 20 days only. Bank will not charge interest on INR 50,000 for a whole month.

Similarly, in a current account, the bank will define a limit. You cannot use more than that. You will have to pay interest only on the amount you use and the duration for which you use the money.

In case of home saver loan, you will have overdraft facility. The bank will sanction a predefined limit. However, there will be a collateral backing for that sanctioned amount. The amount you withdraw will reflect in your overdraft account as negative balance. You will then pay back the withdrawn amount. When you pay back, the negative balance will become positive. What if you don’t pay back the entire amount that you withdraw. In that case, the amount that you don’t pay back will attract interest. The amount you pay back will not attract any interest.

A numerical example will help…

You have an OD account with a sanctioned limit of say INR 5,00,000. An emergency shows up and you need to withdraw INR 3,00,000. Within 20 days, you pay back INR 2,00,000 but you will have to wait say, another 10 days to pay the remaining INR 1,oo,ooo. In such a situation:

  • Bank will charge interest on INR 2,00,000 for 20 days.
  • Bank will then charge interest on INR 1,00,000 for 30 days.

Are There Tax Benefits of Home Saver Loan?

Sadly, though home saver loans provide you the opportunity to save on interest payment, the saved interest cannot enjoy tax rebates under section 80C. But what about section 24?Good news in that area! The interest you save under the Offset loans enjoys tax rebates under section 24 of income tax act. Put in other words, the interest saved is not tax deductible.

What is the Difference Between Home Saver Loan Surplus Parking and Prepayment?

There are a few differences that you should be aware of. These differences are given in a tabular format below:

Sl. No. Vanilla home loan – prepayment Home saver loan –surplus fund
1. The outstanding principal amount is reduced by doing this. Takes down the interest payable on the home loan.
2. Amortization schedule is overhauled and the options for reduction in EMI or loan tenure are provided. Amortization schedule is not overhauled, i.e. no changes are made whatsoever. Interest that is earned on the surplus funds is now used for adjusting the outstanding principal balance.
a.     If loan tenure reduction is opted for majority part of the future EMIs go towards payment of outstanding principal.
b.    If lower EMI is opted for interest portion in the EMI is reduced.
3. Once the money is paid for prepayment, the bank takes the money forever. You cannot use this money again. The surplus fund remains the in current account. Only the interest earned is taken away by the bank but the fund remains intact. In case of emergency needs, the fund can be withdrawn, subject to a sanctioned limit.
4. The amount paid for prepayment is eligible for tax deductions under section 80C. That is, it will be taxed. No tax rebates are allowed under section 80C of Income Tax Act but the money saved on interest payments enjoys tax rebates under section 24.

Home Saver Loan or Offset Loan Account – The Benefits

There are several benefits associated with offset loan account or a smart loan account. Let us take a quick look at the benefits:

  • The surplus money manages to reduce the interest burden on the home loan.
  • The money is only parked in the current account and hence, it can be withdrawn anytime.
  • It allows the feature of redepositing the withdrawn money into the current account.
  • The money that is saved (that is saved interest) is not tax-deductible. In other words, it enjoys tax rebates. If the same money was to be invested in other avenues like interest-bearing bonds, the money that you would earn in form of interest earnings would attract taxes. Also the earned interest would have been much lower. Moreover, the flexibility in terms of withdrawal options would have been absent.
  • Though the surplus fund kept in the account works as part payment for the home loan, it is not considered to be prepayment. Since it is not a prepayment, the bank will not charge prepayment penalty.

One more thing…

The current account linked to the smart loan allows for recurring deposits. This means that you can actually keep depositing some money in this account. This will very quickly help you get the loan burden off your shoulder. Also, because it allows withdrawal, you can actually use the money for dealing with any unforeseen financial contingencies that may show up at any moment.

Are There Any Disadvantages of Home Saver Loan?

Unfortunately, we cannot say no in this case. There are some disadvantages. You need to understand them properly before you buy a product of this nature.

The disadvantages are…

  1. It is expensive because you will be charged higher rate of interest on the home loan.
  2. If a small amount of money is parked, it is nearly useless. You should park a significant amount of money for such a smart loan to be effective.
  3. You cannot earn interest on the parked money. You can earn interest if you invest in mutual funds. In fact, mutual funds will offer better interests.
  4. There are a very limited number of banks that are offering this product under various brand names. So, your choices are very limited actually.
  5. Since the eligibility criteria for different banks differ, your choices may become even more constrained. For instance, Citibank says that minimum of 1 lakh rupee gross income is needed for salaried people to get this loan. Standard Chartered ups the bar to 2.76 lakhs gross annual income.
  6. Though the concept is simple, the math behind it is very complex. You need to clearly understand the math. Do your homework before you rush to buy this loan product.

Should You Buy This Product?

You should know one thing – home loans are big burdens. They are long-lasting by nature. If you are not willing to wait that long and if you have ample surplus money, buying this product will help you shake off the burden sooner. So yes, buying the product makes sense given the conditions are right. But shop carefully. Understand the complex process behind it. Weigh the benefits against alternative financial products and then make an informed decision. That’s when you will win.

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