The biggest struggle for a middle-class family is to own a home, given that neither its purchase nor its construction is affordable any more. Home loans are thus the most crucial of loans, promising to create a lifelong asset for the borrower.
Typically, every borrower would like to pre-close the loan, but this is easier said than done. With any increase in lending rates, either EMIs increase or the tenure increases, both preventing the borrower from wrapping up the loan.
In their quest to pre-close home loans, many people try to set aside funds that they might mobilise by way of incentives, bonuses or other extra income that they earn or receive periodically. As a way to channelise these funds, some banks are offering Home Saver Loans.
What is it?
Home saver loans (HSL) ask borrowers to open a separate account, usually a current account, where they can park any excess funds that they get during the loan payment tenure. Under the HSL plan, the separate account is linked to the home loan account and any outstanding funds in the new account is calculated as funds available with the bank for loan deduction. The outstanding principal amount of the loan is suitably deducted, and the interest component re-calibrated.
Let me illustrate this with an example. Assuming you have availed a loan of Rs. 20 lakh for a period of 15 years at an interest rate of 10.50 per cent per annum.
The EMI for this works out to Rs. 22,108. As per the amortisation math, you will pay Rs. 17,500 towards interest and Rs. 4,608 towards principal at the end of the first month. From the second month onwards, the principal outstanding will be calculated as Rs.19,95,392 (20 lakh minus 4,607), and so on for the remaining EMIs.
Let’s assume that you receive an annual bonus of Rs. 3 lakh and deposit it in the HSL account that’s linked to the home loan account. In the subsequent month, this amount will be deducted from your principal outstanding, and the interest calculated accordingly. This will either reduce the EMI or the tenure of your loan.
An additional feature is that you are allowed to withdraw the amount in the HSL account in case of a financial emergency, but obviously this will take your EMI or tenure back to the original status.
Plus and minus
A linked account like this lets you immediately deposit any excess funds you may receive from time to time, thus reducing your home loan burden each time. Second, by allowing you to withdraw the amount during an emergency, it keeps your liquidity intact.
On the surface, it looks like a useful concept, allowing you to be disciplined about any extra cash you raise. However, by allowing you to withdraw the money whenever necessary, it neutralises the benefits.
Second, the HSL account (if a current account) does not give you any interest on your deposit. Third, HSL loans come at a higher rate than normal home loan rates. Also, banks have set certain minimum earnings criteria, which can keep out many borrowers. Besides this, with the money open for withdrawal, calculating loan and EMI reductions can get very confusing.
If you genuinely plan to pre-close your home loan, it makes more sense to invest any surplus amount you generate in avenues that offer better returns, such as an equity SIP or gold ETF or even a bank RD, thus creating a good corpus over a period of, say, seven or eight years; and then clear your loan once and for all.
