Draft on home loans

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It seems challenging age old traditions and norm is the new trend these days. As kids we were taught that one cannot have a cake and eat it too but new products by the banking industry seem to be changing the rule.

 

Select banks in the country are offering an overdraft facility on home loans which enables a customer to earn optimal yield on their saving by reducing interest burden on home loans. All an individual needs to do is to create an account linked to the home loan, here one can park surplus funds, and one need not pay any interest on the home loan equivalent to the amount parked in this account. For instance, if one has taken a loan of 1 crore then one has to approximately pay interest of 1 lakh per month. In-case of a overdraft product, if one has parked an average monthly balance of 6 lakhs in the overdraft account one need not pay interest on the same amount, which means paying interest only on 94 lakhs and saving a virtual interest on 6 lakhs. The benefit on this product is similar to achieving a tax free return equivalent to one’s home loan interest. At present, this facility is being offered by State Bank of India under its Max Gain home loan account, Citibank's Home Credit, Standard Chartered Bank's Homesaver and HSBC's Smart Home loans. IDBI Bank has also launched the product recently.

 

On one hand though advisors specifically tabulate and check the profile of customers they offer this product to, on the other this product guarantees customers, who have excess liquidity, to get the interest waived. Banks in turn can rotate this fund. Though a little expensive than other home loan products , but it is still a better investment to make than other alternative to fixed investments or even pre paying the loan. This is primarily because even after reducing his interest outgo, a customer still manages to avail a tax break under Section 24 of Income Tax Act.

 

Under this section, the interest on home loans (for self occupied properties) up to 1.5 lakh is exempted from tax and gets the interest waiver on the funds parked in the current account. With the recent surge in the real estate prices, an average borrower pays out interest on high value loan which is more than double the amount for which tax breaks are available. This product gives enough opportunity to reduce the interest liability without losing tax benefits.

 

Bankers are able to extend this facility by treating the loan as a credit line. This means for the purpose of calculating interest the outstanding amount will vary depending on the balance maintained in the account. It is integral for customers to understand that the surplus amount parked in the account will reduce the interest liability, but it will not reduce the outstanding amount. It hastens the repayment as a larger portion of the EMI goes towards principal repayment.

 

Salaried individuals can use the account as their primary account and issue cheques or make regular payments out of this account. On an average, an individual’s salary lies in his/her account for seven days in a month. Even if that money is spent subsequently, he can earn interest for the time the money is in the account. A loan with overdraft facility works well even for those with uncertain earnings.

 

 There are many instances where people who do not have a fixed salary have large balances lying in their savings account or fixed deposit. Parking these funds in the overdraft account enables them to reduce interest costs which is approximately 10.5% to 11%, much higher than one they can earn in a bank post TDS deductions. In a nutshell, though this facility is a big step by the banking industry to make home loans a convenience rather than a deb, it is advisable that funds which are set aside for not investing in ‘high risk-high return’ should only be parked in these accounts. Any investment like savings/ fixed deposit amounts, debt funds etc gives an individual lesser return than the home loan rate should be parked in this account.

The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.

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