Most of us these days buy a house by taking home loan. Now if you have some monthly savings or you get bonus or arrears or some inheritance then you have a dilemma whether to prepay your home loan or set it aside for emergencies. A home saver loan lets you park this extra amount in your home loan account and you can withdraw it anytime for your urgent needs or regular expenses when they become due. The money thus kept in the home loan account reduces the total interest outgo on your home loan and helps you close your loan faster.
What is Home Saver Loan?
Home Saver Loan allows the borrower to deposit his excess savings in a current account linked to his home loan account. While calculating the interest component, the bank deducts the balance in the current account from the borrower’s outstanding principal. Typically, the average monthly balance in the account is considered for this purpose. Meanwhile, the money can be easily withdrawn in case of an emergency. The only drawback is that banks charge about 0.5-1% more than the rate on regular home loans. These are also called as the offset loans.
How does Home Saver Loan work?
All the usual terms of a standard home loan applies to Home Saver Loan too. However, along with the loan you would also get a current account associated with it. The exact linkage between the current account and the home loan is being handled by different banks differently but very similar.
You would be paying EMIs normally just like how you would on any other home loan. In addition, you have the option to deposit more money into that current account. Any amount deposited into the current account gets debited from your home loan’s outstanding principal. So you would not be paying interest on this portion anymore. The idea is to make use of your deposit in your current or savings account to offset a part of the principal. Once some of the principal is offset, interest obligation comes down. So it’s like you have prepaid a portion of your home loan without any prepayment penalities. The best part is that you have all flexibility to withdraw that money out of the current account anytime you want and deposit it back whenever you want.
The concept, though simple, is powerful. This scheme is useful for a borrower who has a sufficiently large balance in his account, and also for a business owner who can park excess funds in his current account.