While purchasing a new home, many of us take a home loan. Also, this is our first brush-up with a huge and a long term debt. A typical home loan is for a tenure of around 15-20 years and thus require a long term commitment from an individual(s).

There are many different type of loan products available in the market to cater to clients needs and one such product that we will discuss today is Home Saver Loan. I took advantage of Home Saver Loan to repay my Home Loan in <3 years.

## How does a Loan Account work?

In a typical Home Loan, an individual availing a loan gets the amount, equivalent to the home loan availed, disbursed. Against this amount, the individual is required to make the payment. Since, the bank is giving the money to account, the bank expects something back as a result. Thus, the payment, called EMI, typically covers 2 aspects (excluding any fees/charges) –

1. Principal

2. Interest

This interest is calculated every month on the total principal that is outstanding . This monthly interest gets subtracted off from the EMI and the amount left is used to repay the principal amount. You can watch this video to check How to calculate an EMI?

**Home Saver Accounts**

If I have to summarize in one word, these are Overdraft Accounts.**In case of Home Loan accounts, the interest gets charged on the Loan Outstanding Minus Home Saver Account Balance**.

Let’s try to understand this with the help of an example.

Assume that Mr. Rahul takes a Home Loan of ₹50 Lakh. With the tenure of Home Loan being 20 years and with an interest rate of 8% p.a., the EMI comes out to ₹41822.

## Repayment in Loan Accounts

**First Payment**

Principal Outstanding at the beginning of month = ₹50 Lakh

EMI for month = ₹41822

Interest for month = ₹50 Lakh x 8%/12 = ₹33333

Therefore, **Principal payment for the month = ₹41822 – ₹33333 = ₹8488**

Principal outstanding at end of month = ₹50 Lakh – ₹8488 = ₹49,91,512

**Second Payment**

Principal Outstanding at the beginning of month = ₹49,91,512

EMI for month = ₹41822

Interest for month = ₹50 Lakh x 8%/12 = ₹33276

Therefore, **Principal payment for the month = ₹41822 – ₹33333 = ₹8546**

Principal outstanding at end of month = ₹49,91,512 – ₹8546 = ₹49,82,966

And so on.

## Repayment in Home Saver Accounts

Let us assume, you have an excess cash of ₹5 Lakh and you chose to add this amount to your home saver account on the very first day of availing the loan. The calculations will now become as follows –

**First Payment**

Principal Outstanding at the beginning of month = ₹50 Lakh

Excess Saving = ₹5 Lakh

EMI for month = ₹41,822 (Save as in previous case)

Interest for month = (₹50 Lakh – ₹5 Lakh) x 8%/12 = ₹30,000

Therefore, **Principal payment for the month = ₹8,488** (Same as before).

Now, we see that EMI was supposed to be ₹41,822, but the total EMI payment has been ₹38,488 (₹30,000 + ₹8,488), so what about the rest of EMI?

**The rest of the amount gets added to the Excess Saving of account.** Therefore, excess amount at the end of the month now is ₹5 Lakh + ₹3,334 = ₹5,03,334.

Principal outstanding at end of month = ₹50 Lakh – ₹8488 = ₹₹49,91,512 (Same as before)

**Second Payment**

Principal Outstanding at the beginning of month = ₹49,91,512 (Same as before)

Excess Saving = ₹5,03,334

EMI for month = ₹41,822

Interest for month = (₹49,91,512 – ₹5,03,334) – x 8%/12 = ₹29,921

**Principal payment for the month = ₹8,546** (Continues to be as per original schedule)

Excess amount at the end of the month now is ₹5,03,334 + (₹41,822 – ₹29,921 – ₹8546) = ₹5,06,689.

Principal outstanding at end of month = ₹49,91,512 – ₹8,546 = ₹49,82,966.

And so on.

## What is the benefit?

When you say above, you do not see that the Outstanding principal amount getting reduced and you tend to think what’s the benefit? However, you also would have observed that the amount of Interest as part of EMI is also getting reduced. So, what actually is happening here?

For the ₹5 Lakh that we kept in the Excess Account, if we would have used to pre-pay our loan, then the overall loan amount would have reduced and you would have seen a clear reducing in the EMI amount.

However, what you would have lost is the ability to get this ₹5 Lakh. So if for any emergency use, you needed the cash, this money was no longer available.

In case of Home Saver, the money you keep in the Excess account serves dual purpose.

a. It helps reduce the Interest Outgo**b. It is available for withdrawal, if the need be.**

As you saw, the **interest that you save gets added to the Excess Account **and thus over time, you have more money available. You can use this to **withdraw or settle against your outstanding Loan Account balance**. Also, the interest is being earned at a rate which is much higher than the rate of interest of a Fixed Deposit account, let alone a Savings account.

The icing on the case is that **you don’t have to pay any tax on the interest that you earned on this account**, which makes it even more interesting and appealing.

This account can thus work as a Safe Heaven for your **EMERGENCY CASH.**

## Few Other Important Points

- Not every bank or Financial Institution offers such product, so you may have to do the research on what products are available and what are their Pros and Cons. Some of the banks that offer the product are Standard Chartered (Home Saver), Citi Bank (Home Credit) and SBI (MaxGain)
- The Interest rate offered on such accounts may be more than those on the traditional loan accounts.
- You will not get any tax benefit for the money kept in Excess Account. Since your Overall Interest Outgo will be less, your Tax benefit against the same will also be proportionally reduced.
- There may be certain other Terms and Conditions. Do consult with the Financial Institution and make sure to be well versed with the T&Cs.