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Home buyers in India have little say in the interest rates on their loans. A high credit score, healthy repayment record, bigger pay package and so on do not fetch any discount in interest rates. They hinge primarily on the overall interest rate scenario in the economy. That is why products with flexible interest payable are a big innovation in the home loan space. Although they are nowhere as popular as the regular home loans, banks such as SBI, Citibank, Standard Chartered, HSBC, among others, offer loans where the interest payable can be flexible. |
THE WORKINGS
These products - called flexi or smart loans - come with some variations, but they work like ’sweep-in, sweep-out’ deposits. Now, such deposit accounts automatically transfer funds that cross the threshold limit in your savings account into a fixed deposit. This helps you take care of your emergency needs and earn higher-than-savings-account return at the same time. ’Flexi’ home loans use a similar mechanism, although with a slight difference. In this case, your loan is usually linked to a current account. "The loan works like an overdraft account where the interest is charged on the outstanding balance on a daily basis. You have the option of withdrawing the unused amount as per the limit sanctioned," says VN Kulkarni, chief credit counsellor with the Bank of India-backed Abhay Credit Counselling Centre.
"The broad concept used here is that of the weighted average, where your principal outstanding is adjusted for the balance kept in the linked current account," adds Kapil Narang, COO, Ameriprise India, a financial planning firm. It could especially benefit borrowers who may have bought an under-construction property, with payments made to the builder being linked to the stage of construction. Here, you would be paying relatively small amounts in installments. If you have a flexiloan, you can withdraw funds only to the extent required and thus save on the interest outgo. Remember, however, that features could vary as per the bank you may have chosen.
COUNT YOUR BENEFITS
Now, say, you’ve opted for a regular home loan. In this case, your salary would be credited to a savings bank account that will fetch you a return of 4-7%. The amount required for your EMI payment would be transferred to your loan account and the balance would continue to earn the savings bank rate. "In a flexi home loan, the amount lying in your home loan account will be factored in, while interest will be charged only on the outstanding balance on a daily basis. If you have parked your entire salary on the first of the month and have not withdrawn any amount say till the 10th, you will save interest on the loan to that extent," explains Kulkarni. "In effect, your savings will fetch interest at the rate which you are paying on your home loan. Your return will be around 10.5-11 %, depending on the rate being charged to you.
This will enable you to bring down your interest cost and ultimately the repayment period." This feature could also spur you to use your income judiciously. You can look at parking as much money as you can in the linked current account to reduce the interest burden. Consequently, your total repayment period, too, will shrink sooner. With a regular home loan, on the other hand, a tendency to splurge the amount remaining after paying EMIs sets in.
WATCH OUT FOR THE PITFALLS
"The rate of interest is usually higher than that of regular home loans," points out Madan Mohan, independent loan counselor. "Also, borrowers should enquire about the processing charges on such credit facilities. There could be other services charges, too, which a regular home loan does not levy." Therefore, study the terms and conditions carefully. This apart, you should go for this facility only if you are sure about making optimum use of its features. Remember, this facility will work to your advantage only if you diligently park your surplus funds into the account regularly.
GAUGE ITS SUITABILITY
Though the concept may seem attractive, it may not fit into the requirements of all borrowers. "The scheme will be best suited for the double income category, where both husband and the wife have a sufficient disposable income," says Kulkarni. They can make good use of their surplus money, which otherwise would have been parked in lowyielding savings bank account.
"It is also suitable for those who earn certain incentives on a regular basis and can afford to park such extra income in a flexi-scheme. Likewise, all those who find that they can pay more than the stipulated EMI every month could also consider such facilities," he adds.