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Pay And Save

Author: Sunil Kumar Singh/Thursday, May 1, 2014/Categories: Loans

Pay And Save

Buying a house is often the biggest investment for most investors, and so they make lot of efforts in scouring the lowest interest rate on home loan offered by banks. But paying I on home loan is a pain and even the most prudent home loan borrower at some point of time could find himself squeezed out. Rising interest rate and soaring property rates further take a bite out of your wallets.
But what if you’re given a home loan that enables you to save on interest payments and thereby reduce tenure of the loan? Banks are coming up with ‘offset balance loan’ — home loan products wherein your home loan is linked with the savings you make in order to reduce the EMI.

The Offer
Called by different names namely, Max Gains, Home Saver, Home Credit, and Smart Home products, the idea behind offset loan remains the same — your home loan account is turned into a current account with an overdraft limit equal to the amount of the loan disbursed. Any payment over and above your EMI outgo goes into the offset account, thus saving on your interest payments as this excess deposit is hived off from the interest component of your EMI.
Take for instance, HSBC’s Smart Home product. Here, all you need to do is to put your usual savings, in the Smart Home account. Depending on the savings you put in the Smart Home account, you can reduce the quantum of interest paid and thereby reduce the tenure of your loan. The savings you make in your Smart Home account every month is skimmed off from your home loan principal outstanding, thus reducing you EMI.
Offset balance home loan, thus, is an arrangement that some banks offer to customers who do not have the funds or saving ability to prepay their loans. In this arrangement, the home loan borrower needs to deposit whatever extra income he has into a current account, which is offset against the outstanding amount on the home loan. 
Offset balance home loans come with various advantages, the most obvious being savings as well as prepaying the home loan. As Kishor Pate, CMD, Amit Enterprises Housing Ltd says, “In this arrangement, the customer can reduce the tenure or the loan and also save on interest.” 

Offset or Prepayment?
Offset accounts are treated as a normal current account and you can deposit your excess savings/ bonus etc rather than keeping them idle in savings accounts. Additionally, you have the flexibility to withdraw the surplus amount deposited in offset account at any point of time. But keep it in mind that being an overdraft account, frequent withdrawals from the account increases tenure of loan. Besides, offset accounts don’t require maintaining any minimum balance in the account during the tenure of your loan.
Let’s see how it works. Suppose you’ve borrowed home loan of Rs 20 lakh. Now if you manage to save or get to receive a surplus amount of Rs 3 lakh from somewhere (bonus/ redemption of mutual funds/ FD returns, etc), you’ve two choices — either prepaying the excess amount or deposit that amount in your offset account. In case of the latter, the interest outgo would be calculated on the loan outstanding less Rs 3 lakh (that is Rs 17 lakh), and not on the entire loan outstanding, i.e 20 lakh. 
So should a home loan borrower go for offset balance home loan or prepaying his home loan? Is offset balance home loan more advantageous than prepayment? Well, not in all circumstances, maintain experts. 
“It all depends upon the customer's investment goals and financial situation. If one is not clear about the near-term outlook of one's finances, then an offset balance home loan provides more flexibility as against the prepayment option,” argues Om Ahuja, CEO - Residential Services, JLL India.

More Expensive?
Despite many advantages, offset loans are not without pitfalls. The first one is that as a standalone product, it may appear costlier as interest rates on these offset loans are usually higher than that of regular loans by 50 or 100 basis points. However, parking surplus funds available with you can earn interest rate as much as being incurred on home loan. This way you get twin advantage — cutting down interest outgo on home loan as well as earning interest on surplus funds.
So, compared to prepayment, offset balance loan not expensive and in fact it’s more advantageous than prepaying the loan.
“Offset balance home loan is a less expensive option vis-à-vis regular home loan or prepayment of home loan as it provides savings at home loan rate itself. A home loan borrower should optimize on offset balance home loan by moving funds from savings account into this loan account to earn additional interest (SB a/c earns 3-4% per annum v/s offset home loan earns 10-11% per annum),” advises Kiran Kumar Kavikondala, Director, WealthRays Group.
Experts suggest offset balance home loan is more suitable for those who lack discipline in savings. “Offset interest home loans may be suitable for individuals who are not in the habit of saving regularly or prudently. This makes prepayment of a home loan in part or eventually in whole impossible for them, so such a product would probably be their only viable recourse,” says Pate of Amit Enterprises Housing. 
Further, if you wish to prepay, banks usually require a minimum amount be paid. This is not required in case of an offset balance home loan. Another advantage is that since interest is calculated on daily outstanding balance, every rupee kept in the offset account each day, goes towards reducing your interest. 

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