Shreya Kshirsagar is a diamond merchant having an average holding of Rs 400,000-500,000 in her savings bank account. When she went on a house-hunting spree, her financial advisor suggested that she opt for a home loan, directly linked to her savings bank deposit amount.
Shreya paid a visit to her bank, and applied for a loan of Rs 10 lakh (Rs 1 million). The interest cost for she was only on the amount arrived at after deducting the her savings account deposit from the outstanding principal loan amount. This means she had to pay interest on Rs 5 lakh (Rs 500,000) in the first month.
ICICI Bank's Money Saver, HSBC's Smart Home, Standard Chartered Bank's Home Saver and Citibank's Home Credit Scheme are the savings account-linked home loan products that offer an alternative to the vanilla home loan products.
The floating interest rate on the savings-linked loan offerings is currently 8.25 per cent, except for ICICI Bank which charges 8.00 per cent. On a normal housing loan, customers would pay interest in the range of 7.5-8.00 per cent.
The 75 basis points difference would entice you to go in for the vanilla product. But the principal component in the equated monthly installments in the initial years will be larger and, hence, the interest on the larger principal amount will obviously be higher.
So, is the savings account-linked housing loan the right option for you.
Typically, if you are a customer having a business banking account with one of these banks, and are able to channel all other funds at your disposal into this account, such a product would serve as a viable proposition.
So, even if you shell out a higher interest rate of 8-8.25 per cent, vis-a-vis the normal rate of 7.5-8.00 per cent, you still stand to gain because of the lower base of the principal outstanding. You could well end up finishing with a reduction of around 45 per cent of the period taken for repayment and 50 per cent of the interest cost.
Obviously, actual interest cost for you will depend on the balance in your savings account.
Let us take a close look at what banks have to offer:
- HSBC has capped the minimum and maximum loan sizes at Rs 5 lakh (Rs 500,000) and Rs 1 crore (Rs 10 million). However, for Mumbai and New Delhi, the maximum is fixed at Rs 2 crore (Rs 20 million).
- ICICI Bank offers loans between Rs 200,000 and 85 per cent of the total property cost.
- Citibank, on the other hand, loans in the range of Rs 210,000 to Rs 1 crore. You can borrow any amount within these limits, provided the amount to be borrowed is less than 80 per cent of the property value.
- Following a different route, Standard Chartered Bank offers loans from Rs 50,000 to Rs 15 lakh (Rs 1.5 million) depending on eligibility norms in respect of the borrower.
But are these loan products for you? They clearly cater to the mass affluent and the high networth segment. If you are a typical middle-class customer and sole bread-earner, it could be a daunting task for you to maintain sizeable balances.
Do not get flattered by the lesser monthly outgo, never know you may end up paying a higher price for not maintaining a consistent balance. So, go in for it only if you are confident of always maintaining higher balances in your account.
