Let us say you took home loan 2 years back and suddenly you received some unexpected cash which may be around 10% to 20% of your home loan principal. You paid this amount towards your outstanding home loan to ease your EMI burden. But after few months once again you need the cash of what you paid to your home loan, then how to get and where to find such huge cash needs urgently? Either you need to take home equity loan or search for any other source to fulfill your needs.
To avoid such compulsions and use your idle amount to reduce your loan too, few banks in India offering the type of home loans called “Home Saver Loans”. In such type of loans usually your bank account (Usually non saving accounts like current account or Overdraft accounts-means no interest on idle amount) is connected to the loan account. Whenever you park more than your EMI amount for that particular month then that amount will be treated as payment towards Principal for that particular month. Your EMI will be same as usual but as principal will be less than the usual principal balance, interest part too will be less. So the remaining EMI part will be get adjusted to principal which get reduced and considered as next month’s principal. Confusing??
Suppose you have loan of Rs.50,00,000 tenure 20 years and rate of interest 9%. Now the EMI for the first month will be Rs. 44,986. In this interest part will be Rs.37,500 and principal will be Rs.7,486 and outstanding loan will be Rs. 49,92,514. Now next month beginning you parked around Rs.10,00,000 into the connected account to reduce your loan burden then next month EMI too will be Rs.44,986. But your outstanding principal for the next month interest calculation will be Rs. 39,84,971 instead of usual Rs.49,84,971. So saving will be one months interest on Rs.10,00,000 loan. Below I showed you different scenarios to make you familiar with this concept.
Let us take example where if Mr.X took home loan of Rs.50,00,000 for the tenure of 15 years and interest for normal loans we consider as 8.5% but for home saver loan we consider as 9% (usually home saver loans have higher interest of around 0.5% to 1% than normal home loans). Let us see the difference between two if in home saver loan option Mr.X start to park in the beginning of the month Rs.10,000 till the loan get fully paid off.
From the above table you noticed that Rs.19,82,914 saved by opting the Home Saver Loan with the option of parking monthly Rs.10,000 into savings account.
Let us take another case where Mr.X parked around Rs.5,00,000 lump sum after into his savings account till the loan amount totally get paid off.
Total saving of interest will be Rs.15,47,020.
I showed above examples where Mr.X paid either monthly payment or lump sum at the beginning of the loan disbursement to make it simpler for you. But in practical this may not the case. In such situations monthly average balance on your savings account will be calculated and adjusted towards the principal for that month.
Let us see few of the advantages of Home Saver Loans.
1) This facility makes you to earn more than your savings account interest rate as indirectly it will be taken as principal towards your home loan which have higher interest rate than normal savings account.
2) If you have surplus cash then it really helps you to reduce your EMI burden in advance.
3) It makes sense to deposit your surplus in this account and take the benefit of lower EMI and withdraw it back when you actually need without any hurdle.
4) This type loan is usually suited to business class or self employed who expects large cash and same can be parked in this account and withdraw it immediately when they need.
5) For salaried people to pay monthly EMI and above that to park cash in this account may not possible. Hence depending on your requirement it is better to go for this type of loans.
Now few advantages of this type of loan schemes.
1) Eventhough in plain it looks simple calculation, but for layman it is bit difficult to understand how their banker calculates and get benefit him or her.
2) Interest rates will usually be higher than normal home loans.
3) Only few banks offer such type of loans.
4) Usually such type loans available on floating rate base instead fixed rate.
Products available as of now for customers are SBI MaxGain, IDBI Home Saver Home Loan, Citibank Home Credit, HSBC Smart Loan and Standard Chartered Home Saver.