Skip to main content

Offset Loans - A better option for businessmen than salaried

When Idea Cellular General Manager Tejasvi Bishnoi finally shortlisted a house on the outskirts of Mumbai, his next task was to identify the loan product that would finance his dream home. His requirement: Rs 70-85 lakh.

Soon, Bishnoi was inundated with home loan offers. Among the many offers that he has, one is an offset home loan. This loan allows the borrower to save and, at the same time, utilises the savings to reduce the interest payable on the loan. At present, an offset home loan is offered through HSBC's Smart Home Loan, Standard Chartered's Home Saver and Citibank's Home Credit loans.

Typically, in this loan, one has to open a current account with the bank and maintain a specific amount as balance. The interest is charged after reducing the principal by the balance amount. The balance amount can go up or down, depending on one's cash requirement. As a result, while the equated monthly instalment (EMIs) will not change, the interest component will keep on fluctuating. This can make a big difference, especially if there is ahigh balance maintained in the initial years, because the interest component accounts for amajor chunk in EMIs.

Take Bishnoi's example. If he borrows Rs 80 lakh for 20 years at a rate of 9.5 per cent, the EMI would be Rs 65,249. In this case, the interest component is Rs 55,417 in the first month and the principal is Rs 9,833.

If he maintains a balance of Rs 3 lakh in his current account, his outstanding will be reduced by that extent and the rate of interest will be on the balance Rs 77 lakh in the first month. This will mean a lower interest payout. As Apnapaisa.com CEO Harsh Roongta puts it: "This amount helps you save the interest payable. So, a penny saved will be a penny earned in this case." Since the current account balance is likely to fluctuate, the rate of interest is calculated on a daily basis in an offset home loan. Hence, if you maintain a current account balance of Rs 3 lakh for 20 days and Rs 2 lakh for 10 days in a month, the interest payable will be calculated on Rs 77 lakh for 20 days and Rs 78 lakh for 10 days.

As the bank is likely to earn alower interest income in this model, the rate of interest on an offset home loan is usually higher by 25-50 basis points. Also, the idle cash in the current account does not earn any interest. If this cash was deposited in a bank account, it would earn an interest rate of 3.5 per cent annually. If it were to be invested in other instruments, the rate of return could be much higher.

Financial planners feel these loans are best suited for businessmen rather than salaried individuals. "Businessmen are more likely to have high cash-at-hand and temporary surplus quite often. And, since the interest is calculated on a daily basis, even if surplus funds are deposited in the account for a single day, it can reduce your interest," says certified financial planner Gaurav Mashruwala .

This is quite unlike a salaried person who gets his pay packet at the start of the month, and his bank balance is likely to keep on reducing during the month because of expenses. Such a loan requires very high discipline in terms of maintaining the balance in the current account consistently for long periods, for best results.

For someone like Bishnoi, a regular home loan is preferable. The surplus, if any, can be invested in the stock market or mutual funds for earning returns. And, the returns can always be used to prepay the loan.

Popular posts from this blog

Real Returns in Investing

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mai...

Franklin India Smaller Companies Fund - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now