Offset balance home loans offer a twofold advantage for the home loan borrower

Offset balance home loan saves the borrower from parting with large sums of money in case of a loan prepayment.

Home loan is a popular financial instrument that has made it possible for people with all financial back grounds to purchase their dream home. While home loan offers a wonderful opportunity to buy a home and pay back in easy monthly installments, the rising price of real estate assets means that home loan is also one of the biggest financial liabilities. Since home loans have a long tenure and a high amount than most other loans, repaying the home loan at the earliest is recommended. A lot of people use the prepayment route to get rid of their home loan liability.

The National Housing Bank and Reserve Bank of India has helped matters by removing any penalty or prepayment charges for home loans. The downside of prepayment of home loans is that most banks or non banking financial companies have a minimum amount stipulated that must be deposited as prepayment. For users who do not have the saving ability or funds to match the prepayment limit, offset balance home loans is a helpful arrangement for paying back home loans swiftly.

Working Mechanism of offset balance home loans

Offset home balance home loan is a financial arrangement offered by banks to home loan clients who are unable to keep a corpus amount for prepayment of their home loans. Under the offset home balance arrangement, the extra income of the borrower is converted into a current account which is linked or offset against the outstanding loan amount. In case of salaried individuals, the salary account of the borrower can also be linked to the same.

The user is allowed to withdraw amounts for essential expense while the remaining amount is offset against the outstanding home loan. This offset home balance home loan is a wonderful tool for those lacking in financial discipline. With funds in the account being offset against the due amount of the home loan, the borrower eventually reduces his or her loan tenure in the long term.

Offset balance home loans offer a twofold advantage

Offset balance home loans offer a twofold advantage for the home loan borrower. Firstly the use of offset balance home loans help reduce the overall loan tenure as the user pays up for the home loan after linking the current or salary account. Second advantage of an offset balance home loans is the fact that it saves the borrower from parting with large sums of money in case of a loan prepayment. The customer can withdraw the money from the current account as and when needed. The interest is calculated on a daily reducing basis even withdrawing money would not be too disadvantageous for the customer.

Let us try and understand the working nature and significance of a of offset balance home loans through an example.

Let us consider Mr. Arun has availed a home loan of Rs. 20 Lakhs from a bank or NBFC. Let us also consider that Mr. Arun is paying an equated monthly installment of Rs 22,000 for his home loan. Since majority of the chunk of the home loan goes towards repayment of the interest amount, Mr. Arun is paying Rs. 20,000 as interest and Rs. 2000 as principal amount repayment.

Let us assume Arun follows the offset balance home loan route and deposits Rs. 10 Lakhs with the current account linked to offset balance home loan. In such a scenario, the repayment towards interest would come down to Rs. 10,000. Since the monthly EMI stays at Rs. 22,000, Arun is paying an additional sum of Rs. 10,000 for repayment of the principal amount. This extra repayment towards the principal amount is likely to bring down the tenure of the loan as well as reduce the overall interest.