Wednesday, January 21, 2009

MoneySaver, HomeSaver, MaxGain -- what's special?

=== specific to India ===

Disclaimer: I am not providing investment advice or anything of that sort. I'm just sharing my experience and knowledge on this topic. Use your own conscience and decide on your investments. You can consider my inputs but the decision is solely yours. I'm not in any way responsible for any profit/loss that you might make based on the information available in my blog here.

What are these? These are the names of a special variant in home loans. Inspite of being many years old and having tremendous power/flexibility, this home loan variant usually goes unnoticed.

Even today, not all banks have this option. Even HDFC does not have one. ICICI calls it MoneySaver, Standard Chartered Bank calls it HomeSaver, HSBC calls it SmartHome and SBI recently launched its own version as MaxGain -- this may not be the complete list. Banks are slowly starting to catch up!

So whats so special about it? All the usual terms of a standard mortgage loan applies to this loan too. However, along with the loan you would also get a current account associated with it. The exact linkage between the current account and the home loan is being handled by different banks differently -- but whatever it is the essence and the effect of this loan type is the same.

You would be paying EMIs normally just like how you would on anyother home loan. In addition, you have the option to deposit more money into that current account. Any amount deposited into the current account gets debitted from your home loan's outstanding principal -- interesting? So you would not be paying interest on this portion anymore. In its effect, it is as good as you have prepayed a portion of your home loan without any prepayment penalities. In an investor's perspective, the current account earns your money interest at your home loan interest rate. What is even more interesting is that you have all flexibility to withdraw that money out of the current account anytime you want (maybe you are in a short credit crunch) and deposit it back whenever you want.

For any loan, the EMIs are devised in such a way that it is slightly more than the interest that you are supposed to be paying. So the rate at which the principal component is repayed is very small in the initial stages. Over time, the gradual reduction in the principal decreases the interest liability, which naturally increases the principal component that you repay in every EMI. These types of loans give you the flexibility to increase your principal repayment as you like it anytime you want -- now, this is a boon.

In the kind of downturn that we see and with the increased interest rates on loans, these kind of loans would generate stable risk-free return with total liquidity. Any money that you own and that you think cannot generate a return at the rate of interest of your home loan, would atleast have a reasonable place to reside. Even the high interest rate fixed deposits are not close to the home loan interest rates.

Then why would anyone not take this loan? Yes, there is a catch. This loan is availed at a premium on the interest rate. The interest rate margin might differ from bank to bank but usually it is around 0.5%-0.75% more than the normal interest rate (be it floating or semi-fixed or fixed). I think this loan in benefical for anyone who has a consistent increase in their annual income (ineffect a consistent increase in their repayment capability).

An example: A 20L loan at 11% p.a for a tenure of 240 months (20 years) will attract an EMI of around 20K per month. If you manage to save 5K more every month and deposit in the current account, the same loan would be closed in just around 140 months (~12 years).

Atleast consider this option before making your next choice!

52 comments:

  1. wheww !!!! what an analysis, very informative.. :-) adding another consultant job to your list ? ;-)

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  2. hehe nothing like that. just sharing what I know. ;)

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  3. Hi,

    This was good information. I think SBI is offering
    Maxgain at the same rate as other loans. Infact,
    this is one offering which seems to be too good
    to be true.

    Do you know of any online calculator, wherein
    you can do analysis of this type (for this type
    of loans)?

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  4. I don't know of any online calculator to analyze the numbers for this type of loan. Usually banks give some excel sheets like this. Some accounting software (like Quicken) do support these kind of loans.

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  5. You can get a calculator from Standard Chartered bank website

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  6. nice analysis..thx

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  7. One should verify whether it is the principal amount gets deducted in whole (of amount of money in MaxGain account) OR only the saving interest obtainable on that deposited amount reduced the Balance Principal from interest calculations.

    That way, it might take longer for the Interest calculations to come down as e.g. 3.5% savings interest may not gain much per month!

    The terms and conditions must be clarified rather get fooled by such online blogs/forums who may spread false information.

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  8. And from the blog postings itself it seems the author himself has commented on his post ;-)

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  9. @Anonymous: You are just trying to confuse yourself and others.

    If you know about any of the mentioned loan types that doesn't work this way, please mention it here. Don't speculate.

    Needless to say, terms and conditions should anyways be read.

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  10. Hi Gerald Naveen,

    I find your analysis very useful. But I need to ask you further on this. I have taken Maxgain loan from SBI of 20Lacs for 20years and EMI is 18k/month. As you said i do deposit 10K extra above my EMI every month. So in a financial year i will deposit Rs. 1,20,000/- above my EMI.

    Now in March when i get a bank statement for tax saving purpose, will this 1,20,000/- be incuded in my Principal Amount component? Having said that Statement should show Interest amount as per EMI, Principal amt = As per EMI + Extra money deposited

    Hope you understood my query. Let me know you views on this.

    Thanks.

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  11. >> will this 1,20,000/- be incuded in my Principal Amount component?

    [Gerald] No, I don't think so. The extra 10K that you deposit, can be withdrawn back any time. The tax exemption certificate should include only the principal component that you have *paid off*.

    That said, because you have decreased your interest by parking more money in your maxgain account, the principal component of your monthly EMI should increase (against the normal amortization schedule of your loan) and this increase in the principal component should be reflected in the tax exemption certificate -- as you would understand, this is paid off and you can't withdraw this principal.

    To put it in simple words, in your tax exemption certificate, the

    principal + interest = (EMI * 12)

    No matter how much money you park extra in your account. It is only the proportion (principal Vs Interest) that varies based on how much money you have additionally deposited.

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  12. I have taken Maxgain loan for a Under construction Flat. The bank has disbursement the 1st installment and rest 3 are still remaining.

    Can I trasfer fund to my loan a/c to get the Max Gain fecility?

    Regards,
    Biswajit

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  13. @ Biswajit : Yes.. You can.. but You can't take money out from the maxgain account till the final disbursement of the loan is made ..

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  14. Dear Friend,

    Excellent review of Max gain Home loan from SBI. I still need some clarification on the subject since i am going to avail the same loan in near future. As mentioned, the extra surplus if parked in the loan account, how the interest factor is calculated and reduced over a period of time. infact how an individual will come to know, is it by number of EMI that is reduced in toto or any other means. Basically want to know the how the benefit of this is intimated to individual by the bank.

    with regards

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  15. Is TDS applicable for the interest earned on the extra cash deployed in this account

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  16. Interest is not earned. You are only reducing the interest that is charged, so no income, no tds.

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  17. How to close a Maxgain account? Suppose I parked 5lakhs in my loan account and my loan outstanding now is say only 50K.

    I want to close the account. What is the procedure? Can I just pay 50K and close the account?

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  18. How can I withdraw extra money parked in the account?

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  19. You should get a cheque book for that account. You can withdraw via cheque.

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  20. Hi, A quick question. Say loan is not fully disbursed, can i still get to operate the account? Or this account is operational only after final loan disbursement

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  21. Not sure. You need to check with the Bank. My "guess" would be, you can't.

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  22. Hi Naveen

    Thanks for the excellent review. I have question. I started the max gain loan in 2007 for 30 lakhs. already paid back/transfered 27 lakhs to my loan account. Bank has disbursed the entire loan amount, 30 lakhs to the builder. I have 8 lakhs Rs with me which I would like to park in my account and earn the interest . I may withdraw this amount(also another 10 laks which is already parked) later when I require.
    So can I park the amount more than the loan amount and earn the interest ?
    Thanks... Anand

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  23. I highly doubt it, although you can check with your bank to be sure.

    It is not even the loan amount, but what matters is the outstanding principal. I know some banks (and I don't know about the others) which do not allow you to park more than x% of your outstanding principal on this account.

    The money you park does NOT earn interest, it just reduces your interest liability (so the interest is perceived, not earned) -- if you notice, the banks give a "current" account for the same reason.

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  24. Thanx for information. But still I confused on the rate of interest. If Extra amount deposited in that a/c, interest will be calculated as per existing Home Loan Rate(i.e 10.75%) or the saving a/c rate(i.e.4%)?

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  25. The extra amount deposited will be treated as a repayment, so your outstanding loan amount decreases. This reduces your interest liability. Note: you would not get a deposit of interest anywhere, but you "perceive" a deposit by reduction in the interest liability.

    In other words, yes the amount deposited will indirectly earn you interest at your home loan rate.

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  26. thanx a lot.It was big confusion of calculation of interest. So now insted of keeping balance in saving account,now I will keep it in loan a/c. Thanx again.

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  27. Sir, if my hsg loan bal (max gain) 1571000/-@10.75% (year 11), i deposit rs.250000/- as on today. Can u tell me how much interest i will get indirectly.

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  28. Like I mentioned earlier, it should earn at the rate of the home loan. In your case @ 10.75% per annum.

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  29. i am planning to take loan very soon .. of around 40 lac. i think this information should help me to explore home saver plans.

    thanks for this post.

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  30. I enquired in SBI. They say Maxgain facility has the same interest as normal home loan. That definitely makes it a good deal, doesn't it?

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  31. Thank you very much for this information. I took SBI maxgain loan. Loan amount is already disbursed 100%. I just wanted to know.. Is loan account is different then current account(to park the additional amount) which we talk in maxgain OR it is same account.

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  32. I think its a separate account....

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  33. Hello,

    Please let me know is Maxgain Home loan scheme is there? or SBI has closed this scheme?

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  34. Its still there....I have applied under maxgain facility. Although my loan hasnt been sanctioned yet, the process is going smoothly.

    I strongly recommend Maxgain as it saves a lot of our money in the long run and also gives us ample liquidity.

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  35. Hi, I got my loan sanctioned and would be disbursed(partially) in a couple of days time. When i asked RACPC guy how do i get online access, got a curt reply to contact the branch thru which I applied for the loan. Any idea about the process? Also I have 5 months of moratorium period, however I asked them to start my EMI from next month onwards and submitted an application to that effect. Surprsingly my EMI comes a tad more(around 200 rs) than the fiure i got thru the emi calculator. The concerned person mentioned that this is because of 5 months interest w/o elaborating on it inspite of my insistence. Any clue in regards to that as well.
    thanks

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  36. Hi Naveen,

    You have certainly provided valuable info. Had a similar query on your statement "Interest is not earned. You are only reducing the interest that is charged." So lets say i have put 1,000,00 in my OD account as surplus which means that if my current interest is 8%, i would earn Rs per year 8000. Is this Rs.8000 subtracted from my outstanding principle or Rs.100000. I m confused about this.

    Thanks in advance.

    Nitin.

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  37. Nitin,

    Yes, in effect, the 8K is deducted from your outstanding principal.

    Just so you understand more clearly, this is how it happens:

    Lets say your EMI was 10K per month. You pay 1.2L per annum. Lets assume, in the 1.2L that you paid in that year, 1L is your interest component and 20K is your principal component. If you had parked 1L in your OD account, your interest liability goes down by 8K per annum (for 8% pa). But, your EMI hasn't changed, so you end up paying 1.2L to the bank for that year -- naturally, your interest component would have become 92K (from 1L) and principal component would have become 28K (from 20K) -- thus reducing your outstanding principal by additional 8K; in other words, your perceived earning.

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  38. Hi Naveen,

    Thx for more clarity. When i met SBI folks, what they conveyed was, let us say that i put 1Lakh in OD account, they suggested that this will be automatically deducted from my outstanding and then interest will be charged on new outstanding amount.

    Thats where confusion has come now from what you have tried to put forward. Do you have any clarity on this ?

    Thanks in advance.

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  39. "that this will be automatically deducted from my outstanding and then interest will be charged on new outstanding amount." -- correct. that is why the new interest liability in the example is 92K (instead of 1L). The 8K that you saved on interest also is adjusted on the outstanding principal.

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  40. My understanding of SBI Max Gain Home Loan is as follows

    * Scenario 1
    Lets say my Loan amount is 15Lakhs, tenure is 15 years & EMI is 15000/-
    If I pay by the above schedule then at the end of the 15years I would have paid Rs 27Lakh to clear my loan.

    * Scenario 2
    Lets say my Loan amount is 15Lakhs, tenure is 15 years & EMI is 15000/-
    If I have some surplus funds, lets say 7Lakhs & I deposit it in the SBI Max Gain A/c then SBI will charge me interest only on 8 lakhs of the loan amount out of the total loan amount of 15Lakh . Therefore the EMI of 15000 that I pay would have less interest component and more of principal amount.
    This will allow me to clear the loan amount in much lesser than 15 years.
    Also at the time of closing loan I would have paid SBI much less that 27lakh as stated in scenario 1

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  41. Hi Gerald,
    Appreciate your beautiful article. Extremely easy to understand for a common man. Well Explained!

    Also i would request other users in general, to abstain making speculations on such informative articles. Atleast Gerald had taken efforts and time to pass on the information he has(irrespective of he himself being a layman like us or a financial guru :) :) :)).
    Anyways thanks All...Thanks Gerald once again!
    Cheers
    -Justin Samuel.

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  42. Hi, one point to remember with this loan is to always ensure that the loan principle amount is greater than or equal to the amount kept in the savings/current account linked to this loan. This is because there is no interest offered by banks on any excess sayings. This is especially applicable during the later stages in one's loan. E.g. if the outstanding principle is 4lakhs and amount parked in current account 8 lakhs, then the savings amount exceeds the principle amount by 4 lakhs. However, bank will give 0 interest on the excess 4 lakhs kept in the savings/current account. So you might as well move the excess money to another account where you will get some interest.....even if it 1 rupee. Remember, banks never give us anything for free so there is no favour to return there.
    Also, make sure you take everything in writing. Bank agents have very short memories when it comes to their commitments. They also can be quite deceitful if one does not have thing in writing.

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  43. Hi, Just wanted to understand HomeSaver (or similar). Assume i have taken a home loan of 30L - 15yrs, choose homesaver @13%. Now my EMI comes to say 13000 per month. After 1 month, by resale of property i got 30L and i decide to put this 30L in the savings/current a/c linked with homesaver and i decide not to withdraw it for next 15yrs.
    Now question is
    1) I won't be required to pay any EMI thereafter?
    2) What would be my balance in the current/savings account after 15yrs?

    Please help understand this product.

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  44. You need to check with the bank to confirm, but this is my understanding:

    Firstly, I assume when you say 'resale of property', you meant some other property; as the property can't be sold until the home loan is settled (off-topic). I assume you got 30L by some means.

    To answer your specific questions:
    1. No, you will need to pay EMIs. The amount you park in your current account only adjusts your interest liability. By parking as much as your outstanding principal (or more), you are not liable to pay any interest for the home loan (Note: you do not receive interest for any excess money parked in there). This would mean that your EMI then, consists of only the principal component. ie., 13000 per month will be deducted towards your outstanding principal and your home loan is paid-back/closed when your EMIs*no.of.months == 13L (approx).

    2. Whatever money you parked in the current account will remain. That is not what you have paid back. You pay back either via EMIs or explicitly via part-payments.

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  45. Great and very easily understood article Gerald. Not being a financial person, it is very difficult for me to understand such concepts, but the way your presented this, has really cleared many doubts.

    I would like to get my house extended (constructed) by another 2 floors. Any idea if I would be eligible for this loan and if yes, how does the disbursement work, since I will need cash as and when the construction moves forward and not large chunks.

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  46. If you are eligible for a normal home loan you should be eligible for this type of loan too. *As far as I know* there is no difference in eligibility.

    For whether you are eligible for any home loan and/or disbursement details, you will need to check with the respective banks.

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  47. Thanks for the valuable information and yes there are many banks which provide loans in India but the important issue with them is loan interest rates for customers. Many other banks and companies interest rate would be too high but I know an organization that helps everyone. EasyloansIndia is the best online loan provider in India as with their online loan EMI calculator anyone can calculate EMI of their loan type within your city. For that you just need to fill the form online with some of your details and they get back to you with an amazing solution.

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  48. Read your post its really informative keep updating with newer post on home loan interest rates

    ReplyDelete
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