New Schemes by Banks to manage your Home loan interest burden

Home loan borrowers were expecting a reprieve from the Reserve Bank of India (RBI) in terms of reduction in the interest on home loans, particularly with regards with those who were paying huge EMIs (Equated monthly installments) on their home loans. However, their hopes were dashed after the RBI decided to hike its key rates last week in its policy review.

Options available:

In such a scenario, borrowers are left with very few options to manage their home loans. One of the most feasible options that borrowers can avail of is to prepay a part of their loan, provided they have surplus cash. This will considerably reduce their interest burden thereafter. Another option that such a situation presents borrowers is to increase the EMI, if they can afford to do so. This will reduce the tenure of their home loan as well as reduce the overall interest that they need to pay.

Bank schemes:

Due to this precarious situation, many existing as well as prospective home loan borrowers are planning to switch to other lenders. However, financial experts caution against resorting to such drastic measures. Instead, their advice is to opt for alternative home loan schemes. There are many such schemes that are linked to an overdraft facility and are offered by banks like SBI, HDFC, HSBC and Standard Chartered. Besides, banks like Citibank offer schemes that are a combination of a simple term loan as well as a credit line facility. However, it is imperative that the borrower chooses the scheme that is apt for him. SBI currently charges 10.15% interest on home loans, HDFC 10.25%, ICICI 10.40% and HSBC 11.50% interest with all these banks charging 0% prepayment penalty.

Benefits:

These schemes or products as they are called in banking lingo differ from one bank to another. The only factor that binds these schemes together is that they are all linked to an overdraft facility. Any extra amount apart from the EMI that is deposited into the home loan account will effectively reduce the principal outstanding amount on the home loan. This will thereby reduce the interest on the loan as well as its tenure. This will be tax-effective to the borrower in the long run as interest saved is non-taxable. Based on the bank’s policy, there could be a provision to withdraw the extra amount deposited provided the transaction charges are paid for each withdrawal.

Pitfalls:

Even though such schemes may provide a lucrative opportunity to the borrower, there is a flip side to them. Such schemes generally charge about 0.25% more than a regular home loan. Besides, there are many banks that charge about 1% annual fee on either the loan amount or the outstanding balance in the account. This effectively means that the borrower would have to pay a considerably large amount to the bank every year.

Cost-benefit analysis:

In such a scenario, the borrower should carry out a cost-benefit analysis to determine whether a part pre-payment is better than depositing a surplus in his loan account. Moreover, it will be beneficial for borrowers to approach a bank that charges a interest that is about 9.5%. The borrower will also stand to gain if he deposits all his savings into a loan account, provided he is in a position to pay the EMI regularly. Such a provision will effectively enable him pay a lower EMI as well as reduce the tenure for loan repayment. It will also facilitate him to withdraw amount from the surplus that he has deposited whenever he is in urgent need.