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

Save Tax With Mutual Funds

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       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...

LIC's JEEVAN SHIKHAR

  LIC's Jeevan Shikhar is a participating, non-linked, saving cum protection single premium plan wherein the risk cover is ten times of Tabular Single Premium. The proposer will have an option to choose the Maturity Sum Assured. The premium payable shall depend on the chosen amount of Maturity Sum Assured and age at entry of the life assured. This plan also takes care of liquidity need through its loan facility. The plan will be open for sale for a maximum period of 120 days from the date of launch. 1.   BENEFITS   : a) Death Benefit: On death during first five policy years: Before the date of commencement of risk   :   Refund of Single Premium without interest. Single Premium mentioned above shall not include any extra amount if charged under the policy due to underwriting decision and taxes. After the date of commencement of risk   : "Sum Assured on Death" equal to 10 times the tabular single premium shall be payable. On death after completion of five policy years but b...

IDFC Nifty ETF

IDFC Mutual Fund has launched IDFC Nifty ETF . The fund seeks to provide returns tha, before expenses closely correspond to the total return of the underlying index, subject to tracking errors. The minimum investment is `5,000 and the NFO closes on 30 September. ------------------------------ ----------------- 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. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. Reliance Tax Saver (ELSS) Fund 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94...

UTI Fixed Term Income Fund Series XVI - I

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Fixed Term Income Fund Series XVI - I (366 days). New Fund Offer opens on : Friday, August 16, 2013 New Fund Offer closes on : Monday, August 19, 2013 Allotment Date : Tuesday, August 20, 2013 Scheme Tenure : 366 days Maturity Date : Thursday, August 21, 2014 Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Inve...
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