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

Surrender ULPPs

  ICICI Pru LifeTime and ICICI Pru Lifestage are Unit Linked Pension Plans. Such insurance linked retirement plans are neither good investments nor do they offer sufficient insurance cover. As you can see, these have turned out to be bad deals. In the Lifetime plan, the fund value is not even equal to the total premiums that you have paid and in the Lifestage plan your return is just about 6% which is quite low. The mortality charges are as per your age which is why they have increased. Moreover, once these plans matures, you will have to compulsorily opt for annuity (regular income) and the annuity rates are generally modest. Assuming these plans mature in the next one year, it will be wise to surrender the plan now and curb your future commitments.   Before you choose to buy a term plan, you have to consider a few points. You need to insure yourself, only during the time you are working and your family is financially dependent on you. At the age of 59, not all insurance companies w...

ICICI Pru Constant Maturity Gilt dividend

Invest ICICI Prudential Constant Maturity Gilt Fund Online ICICI Prudential Mutual Fund   has announced dividend under the following schemes: Scheme Dividend ( R /unit) ICICI Pru Constant Maturity Gilt-DQ 0.26543239 ICICI Pru Constant Maturity Gilt Direct-DQ 0.27171609 ICICI Pru Q Interval Plan I-D 0.10617296 ICICI Pru Q Interval Plan I Direct-D 0.10703967 ICICI Pru Q Interval Plan I Ret-D 0.10617296             The record date has been fixed as June 13, 2016.   ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) ...

Sundaram Mutual Fund new plan Sundaram Fixed Term Plan CJ

Sundaram Mutual Fund has announced the launch of a new fund named as Sundaram Fixed Term Plan CJ. The new issue will be closed for subscription on January 30. --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available are: 1. HDFC TaxSaver 2. ICICI Prudential Tax Plan 3. DSP BlackRock Tax Saver Fund 4. Birla Sun Life Tax Relief '96 5. Reliance Tax Saver (ELSS) Fund 6. IDFC Tax Advantage (ELSS) Fund 7. SBI Magnum Tax Gain Scheme 1993 8. Sundaram Tax Saver   -...

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...
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