Smart Home loans: How smart an option it is?

- By Rishi Mehra, Co-founder, Deal4loans.com

Are you one of those home loan customers who is reeling under severe financial pressure due to your Equated monthly instalments (EMI). Well, then chances are that you have not heard about Smart home loan offered by a select few banks including the State Bank of India, Citibank and HSBC.

Smart home loans, as the name suggests, are an improvisation over the regular home loans. Under smart home loans, banks offer their home loan customers, the facility to get their interest cost on home loan reduced by maintaining deposits in the bank. The interest earned on the deposit is allowed to offset the interest on home loans. A prospective borrower has to open a loan account with the bank which is like a current account with an overdraft facility. The overdraft limit is equal to the amount of loan issued. The borrower can also maintain deposits on the account, but unlike a current account, deposits in the account accrue interest.

The account can be used as a normal savings bank account against which the bank offers debit card and passbook. One can withdraw money lying in the account anytime, and even make EMI payments from the account. Smart home loans usually charge a higher interest rate of 0.10-.50 percentage point higher than regular home loans.

The ‘smart’ part
So what’s so smart about these loans if they charge a higher rate of interest? If after paying the down payment and other costs related to registration of property in India, etc, if you have still some money left with you, keep that money in the smart home loan account. In doing so, the bank would calculate the interest on the home loan after subtracting any deposit maintained in the account every month from the outstanding loan.If the outstanding loan is Rs 30 lakh, and you have an additional deposit of Rs 50,000 in the account during a particular month, than the interest on the home loan would be calculated on Rs 29.5 lakh (Rs 30 lakh-Rs0.5 lakh).

You can always increase or decrease the deposit maintained in the account. If you can maintain an excess amount over and above a threshold limit, which varies from bank to bank, over the tenure of the loan, both the interest cost as well as the tenure of the loan gets reduced.

The threshold limit can be the EMI for the loan or any specific amount fixed by the bank. For example, if the threshold limit is Rs 50,000 and the borrower maintains Rs 75,000 in the loan account, then interest on outstanding loan is calculated by reducing Rs 25,000 from it.For example, an individual has taken a loan of Rs 30 lakh under smart loan option at 10.20% (on regular loans, the rate of interest is 10%) for 20 years. He maintains an excess balance of Rs 25,000 on his loan account throughout the tenure of the loan. By doing so he saves Rs 65,624 in interest cost (vis-à-vis a regular home loan option at 10%) and pays off his loan five months ahead of time.If he has maintained Rs 50,000 on his account one year after taking the loan for rest of the tenure, he could have saved Rs 1,83,993 in interest cost and paid off the balance nine months ahead of time.

Comparison with prepayment option
What if instead of going for smart loan option and maintaining Rs 50,000 excess deposit in the loan account after completing one year, one goes for prepayment option, where the interest is 10% (against 10.2% on smart loan), and pre-pay Rs 50,000 at the end of one year. The pre-payment option not only reduces the tenure by 10 months, but also saves Rs 2,68,098 in interest cost. Clearly, smart loan option is not as smart as it is made out to be. A pre-payment option in regular home loan saves more interest as well as reduces the tenure more.

Features of smart home loan

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