Why 'Home Loan Interest Saver' Is A Smart Option

Nandini Sharma, who had taken a home loan of Rs 10 lakh from a public-sector bank, was facing a dilemma that most people with running home loans often face. She had some surplus funds and she did not know whether to use it for pre-paying her home loan or to save for the rainy day.

'Home Loan Interest Saver' (HLIS) is a banking product that can be the answer to her dilemma. It allows home loan borrowers to pay more from their surplus money but also lets them withdraw from the same pool if they need it during an emergency.

PropGuide brings a lowdown on this banking product and tells you how it could be useful for you:

The product

HLIS provides you the facility of linking your home loan account with a 'Flexi Current account' (an operative current account), and the interest liability of your home loan comes down to the extent of the surplus funds parked in this account. Interest on home loans is calculated on outstanding balance of loan minus balance in the current account, based on the end-of-the-day (EOD) balance.

In simple words, whenever you park an amount higher than your EMI for a particular month, the surplus amount is treated as a payment towards the principal amount for that month. Your EMI remains the same but your principal amount comes down systematically.

Still confused? Here's a simple example:

Somesh Kumar, a senior sales executive, has availed of an HLIS of Rs 10 lakh at an interest rate of 10 per cent for a tenure of 20 years. His monthly instalment comes to, say, Rs 9,650.

Kumar's loan was disbursed on April 1. On receiving his month's salary, he deposited Rs 20,000 in his flexi current account. On April 21, he received some performance-linked incentive and deposited another Rs 50,000 into the account. Later, he needed money for some personal obligation, so he withdrew Rs 70,000 on May 1.

Considering the amount in excess of the EMI that Kumar parked in the current account, the average principal for the month of April will be calculated in this way:

{(10,00,000 x 10) + (9,80,000 x 10) + (9,30,000 x 10)} / 30 = Rs 9,70,000

In simple words, for the first 10 days of the month, the principal amount was Rs 10 lakh. For the next 10 days, with Rs 20,000 in the account, it came down to Rs 9.8 lakh. In the last 10 days, with Rs 70,000 in the account, it further came down to Rs 9.3 lakh. The average for the month comes to Rs 9.7 lakh.

The interest component for 30 days, in the first month of an instalment due of Rs 9,650, comes to Rs 7,973. This interest part is calculated on the average principal amount of the month; that is, Rs. 9.7 lakh in this case. The remaining balance of Rs 1,677 (Rs 9,650 minus Rs 7,973) is treated as a payment towards the principal amount.

In the normal situation, if Kumar had not parked any funds in the account, the total EMI of Rs 9,650 would have had an interest part of Rs 8,219 for 30 days, and Rs 1,431 would have gone towards the payment of the principal.

The example clearly shows that the principal gets paid off quicker under the HLIS system and the money parked can also be used during contingencies.

If no amount is parked in the flexi current account, the break-up of the interest and the principal remains the same as a normal home loan.

The parking of funds in the account can be done monthly or through a lump-sum payment made for the entire tenure of the loan. But the difference will be calculated on the basis of the balance maintained at EOD. No interest is charged on the balance maintained in the current account.

Benefits of HLIS

• If you have surplus cash or have got your annual bonus, you can reduce your EMI burden
• The entire gamut of banking facilities, such as ATM card, cheque book and online banking, can be enjoyed on the flexi current account as well
• You can deposit and withdraw the money whenever you want to

Demerits of HLIS

• The calculation looks simple but is often difficult for a common borrower to understand
• Interest rates are higher than those on normal home loans
• Not all banks offer the HLIS facility
• No interest is earned on the balance maintained in the current account