Home Loans with overdraft account

We have a google group of techies from Hyderabad call Gharonda where we share information regarding various residential projects and related stuff like loans. It is a good initiative as a group of people interested in a particular project can get together and go for bulk deals. Recently other groups have spun-off for other cities on similar lines.

Here is an email I sent out to Gharonda group some time back which many found very useful.

I would very very strongly advise everyone to look at the scheme of home loan where loan is awarded as overdraft. It saves interest and thereby reduces tenure, and turns the argument that home is very illiquid investment on its head.

More details on above.. 

This facility is currently offered by SBI (30 lakh limit), Citibank, HSBC and stanchart. Only citibank and SBI are pursuing home loan customers seriously at the moment.

In this type of loan a current account(no 3.5% interest as in case of savings account) is opened in your name where balance is :

-1 * loan amount

and the interest is charged on outstanding -ve balance. A simple example would be, lets say one takes a loan of 25 lakhs, so the starting balance would be -25 lakhs, which would keep reducing with as the EMIs progress.

Then as and when possible, we should put all our savings into this account. All amount deposited are withdrawble like we can withdraw from a savings account using debit card, cheque or online transfers.

Assuming that after the payment of 24k EMI you are saving another 10k per month, it can be deposited in this account and the interest can be saved. Lets say in the first month, the loan outstanding was 25 lakhs, and a deposit of Rs. 1 lakh was made on 10th, so for first 9 days interst is charged on 25 lahks, then for remaining month the interest is charged on only Rs. 24 lakhs which was the outstanding balance. So just by keeping 1 lakh in that account you would have saved 10%/12 * 20/30 * 1 lakhs = Rs. 555 in interest and this has been reduced in your outstanding principal, that means though you paid the same EMI, you have taken a tiny step towards a quicker loan repayment. This small "Extra" payment into your homeloan will save you interest till the tenure of your loan.

The best advantage of this product in a few years you can deposit all your savigns in this loan, bring the outstanding balance to 0 and pay 0 interest on your loan, without any prepayment and have ample liquidity for all your emergency needs.

I think SBI has waived off the limit of 30 lakhs, as one of my friends recently got a loan of 35-40 lakhs with the new 8 pct scheme and overdraft account.

There is an excel sheet that I prepared to demonstrate the calculation, let me figure out how to attach it and I will post it here.

Cheers!