How savings account-linked smart
housing loans can take care of your emergency needs as well as bring down your
loan liability
Home buyers in India have little say in the interest rates on their loans. A
high credit score, healthy repayment record, bigger pay package and so on do
not fetch any discount in interest rates. They hinge primarily on the overall
interest rate scenario in the economy. That is why products with flexible
interest payable are a big innovation in the home loan space. Although they are
nowhere as popular as the regular home loans, banks such as SBI, Citibank,
Standard Chartered, HSBC, among others, offer loans where the interest payable
can be flexible.
THE WORKINGS
These products – called flexi or smart loans – come
with some variations, but they work like ‘sweep-in, sweep-out’ deposits. Now,
such deposit accounts automatically transfer funds that cross the threshold
limit in your savings account into a fixed deposit. This helps you take
care of your emergency needs and earn higher-than-savings-account return at the
same time. ‘Flexi’ home loans use a similar mechanism, although with a slight
difference. In this case, your loan is usually linked to a current account.
“The loan works like an overdraft account where the interest is charged on the
outstanding balance on a daily basis. You have the option of withdrawing the
unused amount as per the limit sanctioned,” says VN Kulkarni, chief credit counsellor
with the Bank of India-backed Abhay Credit Counselling Centre. “The broad
concept used here is that of the weighted average, where your principal
outstanding is adjusted for the balance kept in the linked current account,”
adds Kapil Narang, COO, Ameriprise India, a financial planning firm. It could
especially benefit borrowers who may have bought an under-construction property,
with payments made to the builder being linked to the stage of construction.
Here, you would be paying relatively small amounts in installments. If you have
a flexiloan, you can withdraw funds only to the extent required and thus save
on the interest outgo. Remember, however, that features could vary as per the
bank you may have chosen.
COUNT YOUR BENEFITS
Now, say, you’ve opted for a regular home loan. In
this case, your salary would be credited to a savings bank account that will
fetch you a return of 4-7%. The amount required for your EMI payment would be
transferred to your loan account and the balance would continue to earn the
savings bank rate. “In a flexi home loan, the amount lying in your home loan
account will be factored in, while interest will be charged only on the
outstanding balance on a daily basis. If you have parked your entire salary on the
first of the month and have not withdrawn any amount say till the 10th, you
will save interest on the loan to that extent,” explains Kulkarni. “In effect,
your savings will fetch interest at the rate which you are paying on your home
loan. Your return will be around 10.5-11 %, depending on the rate being charged
to you. This will enable you to bring down your interest cost and ultimately
the repayment period.” This feature could also spur you to use your income
judiciously. You can look at parking as much money as you can in the linked
current account to reduce the interest burden. Consequently, your total
repayment period, too, will shrink sooner. With a regular home loan, on the
other hand, a tendency to splurge the amount remaining after paying EMIs sets
in.
WATCH OUT FOR THE PITFALLS
“The rate of interest is usually higher than that
of regular home loans,” points out Madan Mohan, independent loan counselor.
“Also, borrowers should enquire about the processing charges on such credit
facilities. There could be other services charges, too, which a regular home
loan does not levy.” Therefore, study the terms and conditions carefully. This
apart, you should go for this facility only if you are sure about making
optimum use of its features. Remember, this facility will work to your
advantage only if you diligently park your surplus funds into the account
regularly.
GAUGE ITS SUITABILITY
Though the concept may seem attractive, it may not fit into the
requirements of all borrowers. “The scheme will be best suited for the double
income category, where both husband and the wife have a sufficient disposable
income,” says Kulkarni. They can make good use of their surplus money,
which otherwise would have been parked in lowyielding savings bank account. “It
is also suitable for those who earn certain incentives on a regular basis and
can afford to park such extra income in a flexi-scheme. Likewise, all
those who find that they can pay more than the stipulated EMI every month could
also consider such facilities,” he adds.
Source – Preeti Kulkarni - The Economic
Times – 20/07/2012
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