Interest Saving Home Loan Schemes

Written by Vidya Kumar

July 5, 2017

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Executive Summary: Some banks offer specialized home loan products. These are linked to a bank account. One can deposit surplus amount in this account. The surplus amount will be treated as pre-payment of principal amount and the interest will be calculated on amount outstanding less the surplus amount. It is suitable for people who can deposit surplus funds and are comfortable financially. It is not great if you have alternate investments to consider. It also comes with some additional expenses that have to be calculated to find out if it is truly beneficial.

For many of us the EMI on our home loan is a big chunk in the monthly expenditure. It is a recurring expense for 10 to 15 to 20 years. Some banks offer a product wherein a current account or savings bank account can be linked with the home loan. A surplus above the EMI deposited in the account will be treated as payment towards the principal amount of the loan. This surplus amount is deducted while calculating interest payable on home loan leading to lower interest outgo.
For example, imagine that you have Rs. 25,00,000 as home loan on which you pay an EMI. This is linked to a current account or savings account with the same bank. Assume that the principal left to be paid is Rs. 18,00,000. Now you get a bonus from your company or received money through an inheritance to the extent of Rs. 2,00,000. If you deposit it in the linked current/savings account, the amount will be assumed to be for the principal amount and interest will be charged only on principal Rs. 16,00,000 (18,00,000-2,00,000). This will lead to reduced interest payable and reduction loan tenure. Some banks like HSBC, SBI and IDBI provide this facility.
The key features are –

  • Once the surplus amount is deposited in the linked account, the interest will be calculated on the outstanding amount less the surplus deposited. The interest will therefore be lesser.
  • The borrower can withdraw the surplus amount anytime. Liquidity is thus not lost.
  • It helps in reducing the tenure/interest payable significantly if there are regular surplus deposits.
  • The amount in the linked account will continue to earn interest just like a regular current or savings account.
  • Interest saved/earned seems to be considered tax-free.

For whom are such products suitable –

  • It is suitable for people who are in a comfortable position financially. It is good for those who can park surplus amounts in bank accounts. It is better than putting the money in fixed deposits as the interest saved on home loans is higher than interest earned in FDs.
  • It is good as the total loan amount paid will reduce if the features of the product are utilized properly.

When is the product not suitable –

  • If you invest in different investment products, parking surplus amounts in a bank account may not be attractive. Surplus amounts can always be invested in other investment products like Mutual Funds where there is a higher possibility of earning returns more than the interest saved by using such products.
  • Such products are not offered by all banks. So if you want to avail of it, you have to choose a bank that offers such a product and also satisfies all the other requirements. If you try to switch your loan for this product, you must consider the money involved in terms of fees and change in interest rates and time and effort involved in the switching and related documentation.
  • The amount invested here cannot be treated as deduction under Section 80C for tax calculation purpose.
  • Some banks charge a slightly higher interest rate on this product as compared to a normal home loan.

It is a good product for people who can manage it smartly such that they are able to reduce the overall interest payment and the loan tenure. Unless you know you are truly going to benefit by depositing surplus in the account, you should not go for it

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