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Journalism of Courage
Victor has taken a home loan for Rs 25 lakh and is regularly paying the EMIs. Despite the interest rate increases,he never defaulted. He has even made a lump sum payment of Rs 5 lakh towards part pre-payment. It was going well until Victor had an emergency expense of Rs 3 lakh,and could arrange for funds with some difficulty.
This is not an uncommon situation. Many borrowers can easily identify such instances where pre-payment of loan puts an extra burden on them as it ate into their savings,leaving them with no contingency measures to face any emergency.
Pre-payment of home loan is a double-edged sword. It reduces the future obligation but incurs opportunity cost and more risk in case of emergency situation.
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 funds and withdraw from the same fund when they face emergency situation like what Victor faced? The ‘home saver loan’ is one such option that not only allows home loan borrowers to pay more in times of surplus and lets them withdraw from the same pool to meet emergencies.
How it works
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 us understand this with the same example.
Suppose Victor,instead of paying Rs 5 lakh as prepayment,would have deposited Rs 5 lakh in his current or savings account linked to his home saver account and left it at that. His interest obligation would have been calculated on the loan outstanding minus Rs 5 lakh. What is more is that Victor can withdraw this money or a part of it whenever he wants it. Let’s see how this works by an example. (See table)
It can be clearly seen that the borrower has saved more than Rs 3,000 in the first month itself. This saving can be huge if you consider the fact that you have to pay the EMIs over several years.
What if you do not have Rs 5 lakh in your current/savings account? In that case,even when you make a recurring deposit in your account,this deposit will be subtracted from the 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 saver 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.
Important points
This is certainly an innovative loan product but it has its own pitfalls. First,keeping money in a savings 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.
Secondly,home saver loans are given at a higher rate than normal home loans. Banks typically charge anywhere between 0.5-1 per cent higher rates than normal 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,the home saver loan is not offered by all banks as of now. Few that offer it are: Citibank,Standard Chartered Bank,IDBI Bank,HSBC,ICICI Bank,and State Bank of India. 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. A little shopping around would help.
The author is CEO,BankBazaar.com
