Home loans are of different types such as fixed-rate loans, floating-rate loans, fixed-floating loans, interest saver home loan, etc. Interest saver home loan is the one wherein your surplus funds can be linked to the home loan to reduce the equated monthly installment (EMI) outgo. Its done simply by linking your home loan amount to a savings or current account and any balance in the account is consider as a prepayment for that period. But, you can withdraw the amount when you require it. Here is how such a loan works and what it means for you.
How does it work?
Let’s say you take a Rs.50 lakh interest saver home loan. Now assume you have a surplus amount of Rs.5 lakh. Instead of prepaying the excess amount, deposit that money in a savings account that is linked to your interest saver home loan account. Once you do that, the interest obligation would be calculated on the loan outstanding less Rs.5 lakh (this is Rs.45 lakh), and not on the entire loan outstanding.
Interest Saver Home Loan Benefits
- Reduces interest burden: The money in the linked current account not only helps reduce your interest burden, while remaining easily accessible,
- Tax free: Any amount in the account is safe from the taxman, since its treated as home loan prepayment amount. Moreover, interest income from the amount is not taxable.
- No prepayment penalties or minimum amount requirement: Though balance in the account is treated as part payment, the bank does not impose any prepayment penalty for the same.
- Power of compounding: Even if you do not foresee a windfall coming your way, you can choose to avail of this product by simply depositing a recurring amount in your current account, say, a part of your salary, and watch the power of compounding work its magic.
- No liquidity issues: Amount remain easily accessible and can be withdrawn through ATMs like a normal savings account
Interest Saver Home Loan Disadvantages
- Offered by limited no. of banks such as IDBI, SBI, CITI are few names.
- Interest rate on interest saver home loan are higher by 0.25% to 1.0% over the traditional home loans
- One can invest rather additional money in another higher return generating avenues such as mutual funds, stocks, etc.
If one ask my opinion, interest saver home laon is the best option while taking a home loan because of following benefits I have received by opting for it
- Saved a lot of interest money over the years in terms of interest, since I am salaried person and have opted for construction linked plan. This resulted in defer payments to builder and I have parked already saved money in the interest saver account. Thus, resulting in significant lower EMIs
- No need for prepayments: While, I simply put even an additional monthly savings of Rs 100 in the account they have to firs save minimum Rs 50000 than consider whether they require that amount later or not. Finally, than they go prepayments. What a hassle.
- Emergency cash funds: Everyone of us have to keep certain some of money at disposable to meet any emergencies which arises suddenly. What I have been doing is using that to be parked in the interest saver account and have withdrew it at times of need
- Cash rotations: This is the killer, everyone of us get salaries towards the last week of the month, while we spend it over the next 15 days. I use this period to park the amount in interest saver home loan account and save interest on it and interest saved is interest earned. Moreover, I use credit cards wisely to pay using them and use 40 days period to park the money in the account and earning interest from it.
- Fixed Deposits: We have tendency to save some amount of money every year into FDs. But, instead I have stated depositing in interest saver home loan account which provides higher interest rate compared to what is offered by the Banks
Remember friends, the interest saver home loan are not pushed by banks owing to one reason that they earn less interest for them. Also, they come with same clauses and fees as traditional loans so no reason to avoid it. Go for it and save your money.
Please visit our finance tips section on our website for more articles.