“Smart” home loans do reduce your interest outgo. But which is the smartest of them all.
By Munir Kulavoor | 11th December, 2013 | Integra FinServe
Banks product teams usually come up with variations of home loans from time-to-time, such as floating-rate loans, fixed-rate loans, fixed-floating loans, teaser rate, dual-rate etc. There is a category of home loans that are gaining popularity wherein your surplus funds can be linked to the home loan to reduce the interest outflow. Here is how State Bank of India’s Max Gain works and what it means for you.
What’s the offering?
In case of Max Gain, you DO NOT have to link a current account to your home loan unlike other banks. You can deposit any surplus funds irrespective of amounts directly in the Max Gain account, the bank deducts it from the principal of your home loan while calculating the interest for the number of days it stays in the account. Whereas other banks insist on a linked current account and the average monthly balance in the account is considered to calculate interest. This clearly demonstrates why SBI Max Gain is far superior in this category as the interest is calculated on daily reducing balance compared to others – monthly reducing balance.
Interest rates charged on such “smart” home loans are usually higher than that of normal loans—0.5-1.0 percentage points more. For instance, HSBC, on its website, states that interest rate on normal floating rate home loan for up to Rs.50 lakh loan amount is 10.75% per annum. However, interest rate for smart home loan for the same amount is 11.00% per annum. Similarly, IDBI Bank charges a higher interest rate on “smart” loan. Its usual home loan interest rate is currently at 10.25%, but 10.50% for the “smart” loans. State Bank of India, which calls this product SBI Maxgain, charges 0.25 percentage points over the applicable home loan interest rate for home loans above Rs.1 crore, the bank states on its website.
Advantages therefore are:
- Mechanism does away with liquidity crunch
- Allows you to maintain emergency fund & simultaneously save
- Huge saving of interest obligation over the entire tenure
- No pre-payment penalty or fee charged
- Interest saved is not taxable
- Faster repayment of loan
How does it work?
You take a Rs.50 lakh home loan, assume you have a surplus amount of Rs.5 lakh. Deposit that money in Max Gain account, 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. (See illustration below)
|SBI HOME LOAN||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Rate of Interest||10.50%||10.50%||10.50%|
|Tenure (in months)||240||240||240|
|Max Gain ‘A’ – is when you deposit an incremental amount every month|
|Max Gain ‘B’ – is when you maintain a constant deposits from the start of the loan|
|Interest Saving||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Interest saving over the tenor of the loan||2,922,867||2,500,805|
|Tenor Saving||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Saving in no. of EMIs||90||62|
|Interest rate on normal loan for similar interest obligation||10.50%||6.66%||7.24%|
This money can be withdrawn fully or partially whenever you want. Even if you deposit a recurring amount in your account, this deposit will still be subtracted from principal outstanding to calculate the interest. Interest component will be lower compared to ammortisation schedule in normal case. As it is a component of EMI, Principal Repayment part will be higher than normal. However, if you don’t deposit money in your account then you will end up paying a higher EMI as the interest rate is higher than that for normal home loan (SBI charges 0.25% extra for loans greater than 1 crore).
Who and why should you opt for it?
Max Gain product may not be as advantageous, if you have avenues such as mutual funds, which can give better returns. Secondly, Max Gain is given at 25bps higher rate than a normal home loan for amount greater than 1 crore. However, this is still better than peer banks typically charging 0.5-1.0 percentage points over the normal home loan rates.
Borrowers must also bear in mind that in normal home loan if he does not pay for 90 days the bank tags the account as Non-Performning Asset (NPA) but in Max Gain if borrower pays even Re.1 short from the EMI it will be treated as overdue and once it crosses 90 days its an NPA. Some banks charge an annual fee of 1% on the outstanding loan amount for this product making it quite expensive; not in case of Max Gain though.
The concept, though simple, is powerful. Another way of looking at it, is that your deposit is earning an interest equal to your home loan interest rate. The idea is to make use of all your surpluses lying idle due to oversight (sometimes) in your current or savings account to offset a part of the principal.
Max Gain suits everybody particularly those borrowers looking for balance transfer of high cost home loan running with other banks. It is imperative for those with home loan linked to Benchmark Prime Lending Rate (BPLR) system before Base Rate system was implemented by RBI w.e.f. 01-07-10. Now if you are an existing borrower and want to switch to Max Gain, first look for the cost. Be prepared to shell out at least fees & stamp duty close to one EMI.
This “smart” product requires the borrower to be smart and utilise its advantages to even undertake financial planning effectively!
In case of a linked current account scenario, you earn an interest from the money that you deposit in the account against which the loan is offset. The amount has to be disclosed to the income tax department. There is ambiguity on how it will work in such cases whereas in Max Gain there is no such issue as the funds are directly credited to Max Gain.
Finally even though the interest rate is higher in this product (> 1 crore), the fact that it reduces the tenor will lower your total loan outgo.