After RBI has made unexpected changes in the monetary policy, the hopes of reduction in interest rates have been crashed, especially on home loans. Home loan borrowers paying high EMIs were looking forward for some relaxation for a while now, but in the run to reduce inflation, RBI doesn’t seem to make any further changes. Borrowers need to opt other ways to move out from the situation.
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Generally a little can be done from the borrower side in order to pay a part of the loan to lessen the interest burden. Increasing the EMI is one of the options to reduce the tenure and hence, the overall interest paid. Some experts believe home loan seekers and borrowers contemplating to switch lenders can consider experimenting with some out of the ordinary schemes offered by various lenders. Such loans, which are linked with an overdraft facility, are HSBC and SBI.Effective schemes offered by banks can prove to be very useful, but the borrower needs to understand his requirements carefully before taking any step.
Unlike conventional home loans which are standard offerings, traits of these products vary with each bank. The common thing that exists between the lenders is the overdraft facility. Any surplus money apart from EMI which you deposit into account will reduce the principal outstanding thus reducing your Interest outgo.
You can also withdraw the additional amount deposited in the account if required, though you may have to pay the applicable transaction charges per withdrawal. This depends on the bank’s policy.
The sum deposited into the account reduces the interest payable for that many number of days and, hence reduces the loan term and the interest repaid over the course of the loan. This also helps to save tax as interest saved is not taxable, while income is tax-payable. Interest over the amount invested as fixed deposits is taxable. If used smartly, it can reduce both your loan’s tenure and the interest paid.
While it may sound advantageous, it should be noted that they charge at least 0.25% more than a regular Home Loan. According to VN Kulkarni, the chief counselor, “You should carry out cost –benefit analysis to ascertain whether a simple part pre-payment is better than depositing surpluses. It might be a smart step to opt for banks that charge an interest rate as low as 9.5%."
So it can be concluded that you’ll be in gain if you direct all your savings into this account and confident of parking surplus.