With the growing popularity of home loans among Indian customers the banks and other financing agencies are constantly coming up innovative products and features to lure more and more customers into their fold. The so called home savers are part of such initiatives to provide greater flexibility to the borrower in repayment of the home loan. There is different nomenclature being employed for implying this feature which reduces the interest burden on the home loan.
What is Home Saver Concept?
Variously known as the offset loan concept this feature was introduced in the Indian markets a few years back to boost home loan disbursements. In this feature the interest element in the monthly installment depends on the actual amount of loan that is utilized during that month.
In addition to home loan account, the borrower also has a linked current account to the primary loan account. The borrower can deposit and withdraw from the current account as per any other current account. The monthly installment is calculated differently for every month depending ion the actual amount that is available after withdrawal from the current account.
Illustration:
Assume a home loan of Rs. 1 Lakh with repayment tenure of 20 years at 9% rate of interest the EMI comes to Rs. 900 per month from September 2012.
Assuming that the borrower makes a deposit of Rs.2000 on the 11 September, 2012 and another Rs.5000/- on the 21st of the same month and withdraws the entire Rs.7000 on 1st October, 2012.
Then the average principal that is outstanding for the month of September will be Rs.97,000 calculated as given below:
- Rs.1, 000, 00 considered for first 10 days of the month
- Rs.98, 000 considered for the next 10 days and
- Rs.93, 000 considered for the last 10 days of the month.
– Thus the weighted average for the month shall be {(100000 x 10) + (98000 x 10) + (93000 x 10)}/30 =Rs.97000/-}.
– Therefore the interest element considered for thirty days in the first month (September) out of an installment amount of Rs.900/- will work out as Rs.728 @ 9% on Rs.97, 000 considered for 30 days, whereas the balance of Rs.172 (i.e.Rs.900 – interest Rs.728) shall be adjusted against the principal.
– When compared with the standard break down of Rs.750 towards the interest and sum of Rs.150 towards the repayment of the loan under the normal home loan one will understand that the principal amount will get paid much faster by this concept even if the money that was deposited in the linked current account is withdrawn subsequently.
The best part about this feature is that when you deposit any money in the current account the same is considered towards the principal amount of the loan for the period it is there. When you withdraw the money the interest thus goes up. The customer is at liberty to keep depositing any additional amount available and freely withdraw and thereby save on the total amount being repaid over a period of time. This is why the Offset Loan concept has become popular all over the world.