Benefits of Home Loan Interest Savings Accounts

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With the Reserve Bank of India raising the repo rate by 90 basis points in just over a month, monthly equivalent payments (EMI) on loans are expected to rise. If you’re considering taking out a home loan, however, there may be some relief at hand. You may consider opting for what is called a Home Loan Interest Savings Account or a Smart Loan. Lenders have different names for this product, for example, it is called Money Saver Home Loan at ICICI Bank, MaxGain Home Loan at SBI and Home Saver at Standard Chartered Bank. The Interest Savings Account may not work for all home loan borrowers, however.

Combined benefits

Under this, your home loan account is linked to a checking account. You can deposit excess funds into this account to reduce your interest debt. The bank will take into account the difference between the amount of the loan remaining due and the surplus parked, on a day-to-day basis, to arrive at the interest on your loan. So if we assume you have a current loan 50 lakh and you hold 20 lakh to the Interest Savings Account, then the interest on the loan will be calculated on 30,000,000. Since banks typically adjust the loan term while keeping the EMI unchanged, the lower interest component will result in a reduced loan term. You must contact your bank if you want the IME to be changed.

Plus, the Interest Savings Account gives you the ability to withdraw the excess (some call it an “overdraft” facility) that you have parked, at any time. Naturally, if you choose to withdraw some of this excess, the interest component of your loan will increase accordingly.

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Accommodation

Financial planners we spoke with said that the interest savings account can be used as a liquidity and contingency fund. “In any case, we will maintain a certain balance in the bank account or we will put money in cash. Instead, you can put any excess into an interest savings account and save on interest charges,” says Suresh Sadagopan, Senior Manager at Ladder7 Wealth Planners.

According to Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, the interest savings account, given its flexibility, can be useful for parking money that can be deployed in different ways or for purposes that can be uncertain (for Indian or foreign education, for example) or the amount to be spent is not known in advance.

Take note

But before you think it’s a win-win deal, note that these loans come with a slightly higher interest rate. “Soft rate home loans typically charge 0.5-0.6% (50-60 basis points) more interest than normal home loans,” says Harshad Chetanwala, co-founder of MyWealthGrowth.com. So, unless you regularly park a sufficient sum in “This can work well for salaried people as they usually keep a reasonable amount in their bank account as a provident fund. This money can be withdrawn based on their needs and at the same time helping them save on interest on their loans,” he adds.

Apart from that, these loans may also come with prepayment and pre-closing fees, which may not apply to regular home loans. For example, Standard Chartered Bank does not charge for partial prepayment or pre-closing of variable rate loans (including home loans) to individuals. But, the partial prepayment beyond a certain amount of the capital remaining due, and the pre-closing in the case of a housing savings loan, entails the payment of a commission.

Prepayment vs Interest Savings

As an alternative to the Home Loan Interest Savings Account, one could simply opt for a regular home loan (which has a relatively lower interest rate) and make partial prepayments, where possible. This too will help reduce your interest burden.

According to Sadagopan, if you want to retain the flexibility to tap into your surplus while reducing interest on loans, the Interest Savings Account may serve you better. But, if you prefer the idea of ​​paying off your loan sooner and it’s unlikely you’ll need that money later, partial prepayment of a regular home loan might be a better alternative.

Remember though that not all banks offer this facility with their home loans.

Dhawan sums it up like this: “If you have the discipline not to keep dipping into the interest savings account, it works better than prepayment. If not, the latter may be better.” He also points out to keep in mind the opportunity cost of the money in the interest savings account. For example, if you decide to ‘use that money to fund your child’s education, instead of going for an education loan (which attracts higher interest than a home loan), this can be a good use of the money, but the spending on other things may not be.

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