Looking for the best home loan? Consider Smart loans

Smart Home Loans Help You Save Interest

Best home loan is the one where you pay the least interest. Smart home loans may have slightly higher interest rates, but it can help you reduce the interest payment.

So what exactly is a Home Saver or a Smart loan?

In a smart loan, a current or a savings account is linked to your traditional home loan at the same bank. You can deposit any surplus funds you have in this linked account. Whenever you deposit a surplus amount in the linked account, the bank considers this as payment towards the principal of your home loan. Hence this reduces your interest liability. The beauty is, you can withdraw the surplus amount whenever you wish. The moment you withdraw the surplus amount, your principal will go up again. Hence instead of earning 4-6% taxable interest in a traditional savings account, you can move the surplus money to the linked account and save 7-8% on home loan (assuming your home loan interest is 10-11%, and you are in the 30% tax bracket).

Let’s say you have a Rs.30 lakh Smart Home loan. You got a bonus of Rs. 2 lakh, and haven’t decided what to do with that money.  While you are trying to decide what to do with the money, you have several options –

1. Put the money in your savings account earning 4-6% interest. You may be liable to pay tax on the interest earned.
2. Pay off Rs. 2 lakh towards the home loan, thereby reducing your interest liability.
3. Put the money in the smart linked account. This will reduce your principal for as long as you have the money in the account.

The benefit of option 3 is, it provides you the flexibility and save interest at the same time. It saves you more than the interest you would have earned in the savings account. At the same time, it will give you the flexibility to withdraw that money or part of it whenever you need.

It gives you the liquidity as well as reduces the liability. Prepaying will reduce the liability, but you don’t have the flexibility in case you need that money in an emergency.

I know of a very few banks that offer this facility. These include State Bank of India, IDBI Bank Ltd, Hongkong Shanghai Banking Corp. (HSBC), Citibank and Standard Chartered Bank. I would think more banks should offer this facility as it reduces their risk of loan default. After all, if you maintain a surplus, what are the chances that you will default?

On the face of it, this looks like a great idea. However, there are certain costs associated with this facility. A smart loan is smart, only if you can negotiate to remove or reduce these additional charges.

Here’s a list of potential charges that are levied on a smart loan.

1. Interest rate for a smart loan may be 0.5-1.0% higher than a traditional loan. This should be an absolute deal breaker. You should be able to negotiate the smart loan interest rate to about 0.1% higher than the traditional loan.
2. Banks may charge account linkage fee, utilization fee, processing fee etc.  Negotiate these down to zero.
3. Banks may also charge a recurring annual fee. Negotiate this to zero as well.
4. Some banks may have a minimum threshold, below which they will not consider the balance in the linked account towards the principal. For example, if the threshold is Rs. 1 lakh, and the surplus in your linked account is Rs. 50,000. This surplus will neither earn interest nor reduce your principal. If your surplus is Rs. 1.5 lakh, your principal will by reduced only by Rs. 50000. In other words, the first Rs. 1 lakh in the linked account will neither earn interest nor reduce your principal.

Here’s the perspectives offered by Livemint and Rediff on smart loans.

HSBC offers this calculator to see the difference between the traditional and smart loans.

In conclusion, the standard offers of the smart loans are not really that smart, but negotiate on the terms and it can end up saving you significant money during the life of the loan.