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Home-Savers

Homesavers are products offered by banks with an EMI break up and are also called off0set loans

Apnaloan.com Research Bureau

10 Aug 2007

There are some innovative products in the market that you can opt for. An analysis...

Offset loans

They come with different names but the basic logic remains the same. Presently three foreign banks (Citibank, HSBC and Standard Chartered Bank) and one private bank (ICICI Bank) have launched an interesting concept inhome loans, where the interest part of an instalment depends on the actual amount of loan utilised during a month. There are various names such as Home Credit (Citibank), Smart Home (HSBC) and (Home Saver Standard Chartered Bank) and ICICI bank.

To put it in simple English, here is how it goes. Suppose Home Credit is available at an interest rate of 9% for a tenure of 20 years. In this case, the monthly instalment works out to Rs.900. Assume your loan amount is Rs.1 lac and the loan is disbursed on September 1, 2006.

In addition to your loan account, you also have a linked Current account with the same Bank. You can then deposit or withdraw from this Current account just like any other current account. Every month when the loan instalment is paid, interest at the applicable rate is calculated on the aggregate principal outstanding after taking into account the balance, if any, in the linked current account. An example will make this clear:

Assuming you deposit Rs.2000 in cash on the 11th of September, 2006 and another Rs.5000/- in cash on the 21st of the same month and withdraw the entire Rs.7000 on October 1, 2006. The average principal outstanding for the month of September will be Rs.97,000 calculated as given below:

Rs.1, 000, 00 for the first 10 days

Rs.98, 000 for the next 10 days and

Rs.93, 000 for the last 10 days.

The weighted average will be {(1, 00, 000*10) + (98, 000*10) + (93, 000*10)}/30 = Rs.97000} The interest component for thirty days in the first month out of an installment amount of Rs.900/- works out to Rs.728 at the rate of 9% on Rs.97, 000 for 30 days, while the balance Rs.172 (Rs.900 minus interest Rs.728) will be adjusted against the principal. Compare this with the normal break up of Rs.750 towards interest and Rs.150 towards repayment of loan under the normal home loan (See EMI Break up calculator on www.apnapaisa.com for details); you can see that the principal gets paid off much quicker in this system even where the money deposited in the linked current account is subsequently withdrawn.


Every month, a similar calculation will be done. The beauty of the system is that the money you deposit in the linked Current account in any month can be withdrawn freely, and it will mean that out of that month's installment, the interest portion will go up proportionately. In fact if you do not use the linked current account at all, the break-up of interest and principal will remain the same as a normal home loan.

The advantage of this product is that it allows you to use both your temporary and permanent cash surpluses to reduce your interest liability on your home loan and at the same time gives you the flexibility of withdrawing the surpluses for other uses as and when you may require. These loans are normally priced higher than regular home loans.

Overseas, these kind of loans are popularly referred to as "offset loans" as the balance is the linked account offsets the home loan amount.



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