Spend, Save and Invest Smartly

# What are Home Saver Loans?

You have taken a home loan to buy that dream home. At last…a roof over your head. The problem is your home loan is swallowing all your money as interest paid on the home loan. Should you opt for a home saver loan?

### How does a home loan work?

Your EMI (Home Loan) = EMI (principal) + EMI (Interest).

You must be knowing that the EMI you pay on your home loan is divided into 2 parts. The principal part and the interest part. The principal part is used to repay the actual sum (amount) you have borrowed. If you have availed a home loan of INR 20 Lakhs then your EMI (Principal) pays back this amount. This amount of INR 20 Lakhs is not given to you free of cost. You have to pay an interest on this amount which could be 10.5-11% depending on which bank you avail a home loan. The EMI (interest) is used to repay this amount. In the initial years of your home loan your EMI (interest) is high and most of the money you repay goes towards paying back the interest on your loan. The amount which you repay which goes towards paying back your EMI (Principal) on the home loan is very less.

You can understand this through a simple example : You have availed a home loan of INR 25 Lakhs which charges you 10.5% rate of interest for tenure (time period) of 20 years (240 Months). The EMI paid is INR 24,959. You can calculate the home loan EMI using this calculator. The total EMI (Interest) is calculated as INR 34,90,279. (Refer calculator) You can also calculate your own home loan EMI if you know the tenure (Time of borrowing), the interest charged on the home loan and the Principal (Amount you borrow) of the home loan you have availed using this calculator.

### What is a home saver loan?

This is basically a home loan where your home loan account is linked to your savings bank account or your current account (If you are a single proprietor or a businessman). Any amount you deposit in your savings account or current account will go towards repaying the EMI (Principal) on your home loan. If you get a huge bonus (Diwali Bonus) this amount will be used to pay the EMI (Principal) on your home loan provided you deposit in your saving/current account.

Remember : The money you deposit in your savings/current account reduces the EMI (Principal) of your home loan which automatically reduces the EMI (interest) you pay.

### What is the eligibility criteria to take a home saver loan?

• Some banks ask for a gross annual salary/income of between INR 1.5 -3 Lakhs.
• You might also require a work experience of at least 2 years.

### What if you require the money in your current/savings account in a hurry?

If you have made a large deposit in your savings/current account and a lot of money is lying in this account you can withdraw this money for any emergencies such as a medical emergency. The money that is stored in this account is not taxed.

### What is the Interest charged on your home saver loan?

The interest charged is about 0.5-1 % more than the normal home loan rates. If a bank charges a home loan interest rate of 11% to a normal customer you will be charged an interest of 11.5% on this home saver loan.

### What are the benefits of a home saver loan?

• The home saver loan is useful if you have excess money lying in your savings bank account. If you are a businessman you can use excess funds in your current account to pay the home loan.
• You can use surplus funds you get such as a Diwali bonus to pay the principal portion of your EMI by depositing it in your saving/current bank account. This automatically reduces the interest portions on your EMI.
• The amounts in your current account which are stored to pay back the home loan are not taxed.
• The excess money in your current /savings account can be withdrawn in an emergency.

### What are the disadvantages of a home saver loan?

• You are charged a higher rate of interest which may be 0.5-1% more than the normal home loan rates .If you don’t have surplus funds and no bonuses then you will simply be paying a higher rate of interest.
• You can use surplus funds you get such as a Diwali bonus to pay the principal portion of your EMI by depositing it in your saving/current bank account. This automatically reduces the interest portions on your EMI.
• Only some banks offer this facility. You will have to search for these banks.
• You can off course invest excess money (Bonus) in mutual funds to get a high rate of return instead of paying off the home loan.

### How does a home saver loan work?

You have the above example where you have availed a home loan of INR 25 Lakhs with a tenure of 20 years and an interest rate of 10.5%. If you take a home saver loan the interest is 11% which is 0.5% higher than the normal home loan rates. You get a Diwali bonus (Or any bonus of INR 5 Lakhs) which you use to pay off the EMI (Principal) and reduce your home loan liability by depositing it in your current/savings account.

Diwali Bonus = INR 5 Lakh.

You can see the calculations of your home saver loan in this excel sheet. You would be paying a higher EMI of INR 25,805 in your home saver loan than an EMI of INR 24,959 on your home loan but for a lesser time frame (tenure) of only 136 months (11 years and 3 months) compared to 20 years (240 months) in the case of a home loan. You will also be paying a total EMI interest of only INR 15,20,897 as shown in the excel sheet on your home saver loan.

### Conclusion

If you had availed a home loan you would have to pay a total EMI (Interest) of INR 34,90,279 for a home loan tenure of 20 years. If you had availed a home saver loan you would have to pay a total EMI (Interest) of INR 15,20,897 only for 11 years and 3 months.

### Your saving on availing a home saver loan

• A lesser EMI (Interest) of INR 34,90,279 – INR 15,20 ,897 = INR 19,69,382.
• A lesser loan paying tenure of 20 years – 11 years 3 months which means you save paying the home loan for 8 years 6 months if you avail a home saver loan.