All home loan subscribers face this confusion of whether to make prepayments in home loan or to save the extra money as emergency fund. I will accept on basis of my personal experience that the reflex to make prepayments in home loan (specially in initial years) is very strong. In year 2009 my father took home loan from LIC at interest rate of 7.5% per annum. In 2011-12 the interest rate climbed to nearly 11.5% per annum. During these periods the urge to prepay the home loan is strong. With EMI leaping beyond limits of ones affordability because of untenable inflation, common man does not see an alternative but to resort to prepayment. But the confusion of whether to prepay or accumulate funds for emergency is tough to ignore. For such people there is a financial alternative called as home saver loan.
Home saver loan is an account that is tied up with your home loan account. Suppose this month you have an excess cash of Rs 15000 that you want to use to prepay your home loan. Instead of prepaying you can deposit this excess cash in your home saver loan account. The money lying in your home saver loan account (is a current account) is treated as pre-payment for your home loan. While calculating the interest on balance home loan, the amount in home loan account is deducted from the outstanding principal component of your home loan. In case of emergency you can withdraw the money from your current account.
But what is the catch? The catch is that, home saver loan accounts charge 1% interest extra on your outstanding principal. Suppose you are paying an interest of 10.5% on your home loan. The interest you will pay for availing home saver loan account will be 11.5%. Not lot many banks offer this facility now; few banks like SBI, IDBI, Standard Chartered & HSBC is offering home saver loan account in India.
Let us see how home saver loan is different from normal home laon
|Benefits of Home Saver Loan Over Savings Normal Home Loan|
|Description||Home Saver Loan||Normal Home Loan|
|Loan Amount||Rs 30 Lakhs||Rs 30 Lakhs|
|Loan Tenure||20 Years||20 Years|
|EMI||Rs 29,951||Rs 31,993|
|Interest Paid||Rs 41,88,335||Rs 46,78,293|
|Balance in Home Saver Loan Current Account||NIL||Rs 5,00,000|
|Interest Paid Now||Rs 41,88,335||Rs 20,36,239|
|Loan Tenure Now||20 Years||12 Years, 8 Months|
|Interest Savings||Zero||Rs 26,42,054|
Advantages of Home Saver Loan Account
If you prepay in normal home loan, that amount is lost forever. But in home saver loan account the prepayment is saved in your current account that is available at your disposal even after prepayment. If you will ask me, I will use this current account as my recurring savings account which is going to save me lakhs on interest (of home loan).
In order to make the most of your home saver loan account, I will suggest that you can use your emergency fund to work for you. In general, I maintain my 12 months of expense in my emergency fund. Since last five years I have Rs 700,000 in my emergency fund account. I would like to transfer this Rs 700,000 from my emergency fund (fixed deposit) to home saver loan account. This will not only reduce my loan tenure and save me on interest but will also be available incase I need it in tough times.
Home saver loan accounts charge 1% higher interest than normal home loan accounts. In case you are not sure of prepayment ability, it will be needless to opt for home saver loan account. Another alter to home saver loan account is your ability to generate better return from investment. What I mean is, suppose you pay 11.5% interest on home loan. If you have Rs 5lakhs as extra cash and if you are confident to generate higher return (more than11.5%) per annum then you must use Rs 5 lakhs for investment instead of making prepayment.