Are you planning to take home loans in the near future? If so, we suggest you to do some homework. If you see the advertisements of various banks and Non-Banking Financial Companies (NBFC), they highlight the interest rate on home loans. But according to us, there are many more issues than interest rates which one has to look into. One important aspect is about the type of loan – fixed, floating or smart home loans. Through this article, we have made a modest attempt to write the benefits of smart home loan over other options.
The main difference between regular home loans and Smart Home Loan
This can be better explained through example. Suppose Mr. Kiran avails a regular home loan of Rs.40 Lakhs. For a tenure of 10 years, he has to pay an EMI of Rs. 54000. Suppose, during the tenure if he repays a part of the money (pre-payment), say Rs.10 Lakhs, the banker will accept the same and adjust it against the total loan. In case he wants to retrieve (take back) the additional amount paid, he is not allowed to do so.
Whereas in case of Smart Home (or any other name called by the banker), the loan account will act similar to Saving Bank account. You can park (keep) your surplus money in loan account and withdraw as and when you feel like. The interest for the period (or days) in which the surplus money is kept in the loan account is charged on the balance amount. For example, in the case of Mr.Kiran’s loan, if he keeps Rs.10 lakhs in the home loan account for 20 days of the month, the interest is charged on Rs.30 lakhs (instead of Rs.40 lakhs).
Thus, the smart home/home saver account will help the borrower to reduce the interest burden. One needn’t keep money in Savings bank account for emergency. He can as well use home loan account as savings bank account! Don’t you think this is the best home option?
Many of us are not aware about this option. This scheme is not known by many people because banks are not aggressive in selling this product as it is not as profitable as regular home loans. But from a borrower’s perspective, this is a much better alternative to fixed income investments or prepayment of loan. Banks like SBI (SBImaxgain), Standard Chartered Bank (HomeSaver) and HSBC (Smart Home) offer these loans as home saver, smart home etc.
How Home Saver or Smart Home Scheme works?
As I have explained earlier, the Home Saver or Smart Home Scheme is like any other home loan scheme, but provides an overdraft facility to withdraw money similar to current account. The best part of the scheme is bank provides cheque book, ATM card and internet bank facility for the home loan account and you can use the home loan account just like any other bank account. You can deposit surplus amount in the home loan account for any number of days and pull it out anytime for day to day expenses without prior intimation to the bank. The money thus kept in the home loan account reduces the total interest outgo on your home loan.
This product generally has the same interest rate than the other home loans or interest rate more than the normal housing loan interest by 0.25% to 0.50% and there will not be any extra charge for using overdraft facility.
How will it reduce interest outflow?
In a normal home loan, there is a fixed EMI that you have to pay every month. As and when you pay the EMI, one part is applied towards interest on outstanding loan amount and balance left goes towards repayment of principal amount.
However, as discussed earlier, in the case of home saver or smart home scheme it comes with current account format where, in additions to EMI, you can park surplus amount and keep the amount any number of days. Any surplus amount deposited over and above EMI will be allowed to be withdrawn any time. Monthly payment of EMI is not required as long as your surplus amount parked in the account is sufficient to cover EMI.
The bank will calculate the interest on net loan balance i.e. principal outstanding minus (-) surplus amount deposited in the account on a daily basis and is debited at the end of the month. Even if you park surplus amount say Rs. 2,00,000/- for 15 days, you will save interest on Rs. 2,00,000/- for 15 days. By this way if you use this account smartly you will reduce substantial amount of interest over a period of time.
(Download housing loan interest calculator to check how it works and how interest calculation is different in home saver or smart home account when compare to normal housing loan)
Benefit of Home Saver or Smart Home scheme
- It provides overdraft facility for withdrawing money any time.
- You can deposit surplus amount or liquid cash any time and get an interest deduction on your home loan.
- Prior intimation to the bank is not required for withdrawing amount to the extent of available balance (surplus amount deposited). In the normal housing loan scheme you need to apply for fresh sanction for withdrawal and need to shell out processing fee and it consumes time.
- You can also use this as an alternative to personal loan as this would offer lower interest rate.
- You can use this facility as a tool to save tax and maximise your wealth.
- It helps in closing your loan account faster. (check housing loan interest calculator)
Negatives of Home saver or smart Home scheme
- As it provides overdraft facility, you may get tempted to withdraw money for unnecessary expenses and in the process you may not be able to save money.
- If you are paying only EMI and not in a position to park surplus amount any time during the tenure of loan, you may end up in higher interest outflow as this scheme charges interest rate slightly more than the interest rate charged for normal housing loan.
- You will not be eligible to claim section 80C principal repayment benefit for the surplus amount parked in the home saver account.
Whom Home saver or smart Home scheme suits best?
Most home loan borrowers face the dilemma of whether to use their monthly savings to prepay their loan or set it aside for emergencies. In most cases, the extra money just sits in their savings accounts earning below par (and taxable) interest. For those people this scheme helps a lot. The scheme is ideally suited for these individuals:
- Self employed or business man whose earnings aren’t constant.
- Salaried employee who have surplus amount after paying EMI and monthly expenses.
What do you think? Please share your views and thoughts in “comments” section. You can also post your query at [email protected]