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

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...

Health insurance guide - Part I

Insurance, by definition, is morbid. What if I die suddenly? What if my home caught fire? What if I had to undergo expensive medical treatment? What if something that I thought happened only to others befell me? Insurers, who work with large samples, calculate the probability of such an event and, hence, the possibility of them having to pay out a sum of money to mitigate, to the extent possible, the effects of that disaster. However, the possibility of you undergoing some kind of expensive medical treatment during your lifetime is far more likely than you dying suddenly or your house burning down. Given that costs at private healthcare facilities, where you are most likely to land up, is high, and, doubling every four years 10 months or so, the rest of your money life could easily go out of whack if you had to incur such expenses. Just 12 per cent of India's population is covered with some sort of health insurance. Pared to the bone, for a comparatively small price, health insu...

Use Mutual Fund SWPs for getting fixed payments

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   Investors time withdrawals optimally to save on tax The systematic withdrawal plan, or SWP, could be called the lesser known cousin of the much talked about and publicised systematic investment plan (SIP). There's yet another cousin — the Systematic Transfer Plan ( STP ). In SIP, you invest a fixed sum of money at regular intervals (monthly/ quarterly) to buy some units of a mutual fund scheme. In SWP, as the name suggests, you do the opposite: You redeem some mutual fund units from your portfolio to get a fixed sum of money at regular intervals (monthly/quarterly/half year/yearly). In SIP, you get a higher numbers of units when the markets are down, and lesser in a buoyant market. In SWP, going by the product logic, you redeem higher number of units when the markets are do...
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