You can reduce EMIs, tenures of home loans by opening current account

The EMI (equated monthly installments) paid every month in case of home loan upset your budget. But if you plan your spending you can reduce the tenure and, also the interest component in your loan - in some cases will be reduced by half.

For instance, you take a home loan of Rs 10 lakh whose tenure is 20 years you have to pay an EMI of Rs 11,361. From your savings if you keep aside another Rs 3,000, you can reduce the tenure of your installments by 48 per cent and will be able to save around 53 per cent in interest.

Such scheme works in those cases where a bank grants a home loan and at the same time opens a current account, through whi­ch the EMI is to be paid. Usually, banks cha­rge 0.5 per cent higher for such schemes than the normal home loan rate. The banks offering such sche­mes are State Bank of India offers and some foreign banks such as HSBC, Standard Chartered and Citi­bank.

“Since the interest rate will always be higher than the deposit rate, this is an ideal product in which one can save a lot on the interest part and clear off the loan at a faster rate,” a senior SBI official said.

However bank does not give any interest on the amount ke­pt in a current account. But you can save extra money in your current account which will be advantageous. Banks calculate interest rate of your home loan on the principal amount outstanding minus the amount that is available in the account. This is calculated every month, and on the daily basis. Although this will not bring any change in the EMI amount, but the bank will reduce the tenure depending on how much interest has accrued from your mo­ney in the current account.

According to one of the financial expert, “Overseas, these kinds of loans are very popular and are known as ‘offset loans’ as the balance in the linked account offsets the home loan amount. These loans are the best for individuals who look to repay the home loan early by saving some sum in their kitty”.

Under this scheme you have the flexibility of using the money in the current account, in case of need. According to financial expert, “The advantage of this product is that it allows you to use your cash surplus to reduce interest liability and at the same time gives the flexibility of withdrawing whenever they want”.