At a time when interest rates on home loans are rising, new borrowers should look at a home loan interest saver account which can help them to reduce the interest cost without compromising the liquidity. Under this facility, the lender opens an overdraft account in the form of savings or current account wherein the home loan borrower can park his excess savings and withdraw from it based on his cash flow requirements.
How does it benefit borrowers
Many banks and housing finance companies offer home loan overdraft facilities, branded as Home Loan Advantage, Maxgain, Home Loan Interest Saver, etc., to their home loan applicants. When the interest component is calculated, the bank will deduct the balance in the super saver account from the outstanding principal. The average monthly balance in this account is considered for the calculation of the interest.
Adhil Shetty, CEO, BankBazaar.com, says the best thing is that an individual can use this money whenever he faces an emergency, or in need of the money for anything important. “It helps in bringing down the interest of your home loan to the extent of funds parked in your current account. You can withdraw or deposit funds whenever required,” he says.
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The home loan interest costs for the borrower is calculated after deducting the amount deposited in the savings/current account from the outstanding home loan amount. Ratan Chaudhary, head, Home Loans, Paisabazaar, says this allows home loan borrowers to derive the benefit of making prepayments without sacrificing their liquidity. “Home loan borrowers opting for the home loan overdraft facility can even park their emergency fund in the linked overdraft accounts. This would help in saving their interest cost without compromising on their liquidity,” he says.
What to consider
The eligibility criteria for this facility may vary from bank to bank. Some banks may require higher salaries and more work experience to allow the super saver account facility. A borrower must remember that the deposit in the current account will not generate any interest. Secondly, home saver loans are expensive as compared to regular home loans. Shetty says one must avoid hasty decisions as calculations of interest might be confusing. “Understand the calculation for a home saver loan and get clarity on additional charges you might have to pay. You must understand the terms and conditions clearly before rushing to opt for this product.” he says.
As the home loan overdraft option offers higher liquidity and flexibility to the borrowers, lenders usually charge slightly higher interest rates for home loan overdraft products than their regular home loan schemes. “Thus, applicants should opt for the home loan overdraft option only if the potential of interest cost savings outweighs the higher interest cost incurred through the home loan overdraft facility,” says Chaudhary.
Smart ways to prepay
Existing borrowers have multiple prepayment options depending on their repayment capacity. For one, those who have seen improvement in their credit profile after availing home loans should compare the home loan interest rates offered through home loan balance transfer facility. Their improved credit profiles may make them eligible to transfer their existing home loans to other lenders at much lower interest rates.
Secondly, one way is to pre-pay 5% of your outstanding principal each year. Typically, for a 20-year loan, doing this can bring down the tenor of your loan to 12 months, assuming a constant rate. You can choose to make lumpsum prepayments once a year or split and pay once every quarter. In this case, a borrower would prepay around a third of the loan as prepayment and the rest as EMIs. This allows you to get out of debt faster and leave you with more money for your investments.
Borrowers should prefer the tenure reduction option as it leads to higher interest cost savings than the EMI reduction option. “The EMI in case of tenure reduction option would remain the same as earlier. Thus, only those borrowers who wish to reduce their EMI burden should opt for the EMI reduction option,” says Chaudhary.
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Another way is to prepay a certain amount over and above the EMI every month. “This accelerates your repayments, and you close your debts faster. You can also step up your EMI every year as your income increases. You can choose what prepayment plan works for you based on your current finances and the prepayment terms and conditions in your loan agreement,” says Shetty.
* Opt for it only if the potential of interest cost savings outweighs the higher interest cost incurred through the overdraft facility
* Home loan borrowers can even park their emergency fund in the linked overdraft accounts
* Interest rates for home loan overdraft products are higher than that on regular home loans