How Offset Loans Help in Reducing Interest Rate of Your Home Loan
We share the advantages of offset loans, and why they are great for helping you pay off your Home Loan faster. Read on!
Is paying the EMI on your Home Loan weighing down on your shoulders, and limiting your monthly budget? While opting for a longer loan tenure can make your Home Loan EMI more affordable for you, you will end up paying more interest to the lender. Offset loans are a great option if you are looking to reduce the interest rate and repayment amount of your Home Loan.
Here is all you need to know about offset loans:
What is an Offset Loan?
An offset loan is one where the borrower is made to maintain a savings account with the bank or lender which is linked to their loan account. Instead of receiving interest on the savings account, the monthly interest payment on the loan is calculated on the net amount of the loan balance less the savings account balance, and not the entire loan amount. At the end of each month, the interest payment to be made is calculated on the loan principal minus whatever balance is left in the linked savings account. This reduces your interest payments.
Essentially, instead of earning interest on savings, you are reducing the interest paid on your Home Loan. However, how do you make an accurate assessment on the overall impact? By comparing how much savings interest you could stand to earn as against how much interest payment you are reducing. This helps you understand the net impact on how much money you could save. For example, you took out an offset loan of Rs.10 lakh at an interest rate of 10% and deposit Rs.70,000 in the first month. The monthly interest to be paid would not be calculated on the full Rs.10 Lakhs, but instead on Rs.9,30,000 (the principal less your deposits).
By maintaining a savings account with your lender (despite earning no interest) and making deposits, you are able to reduce interest rate payments and save money. What’s more, you aren’t required to make a fixed level of regular deposits into the linked savings account, thus, it is your decision on how to manage your funds. Whether you want to use surplus funds for reducing your interest payments or funding other financial needs, the flexibility is entirely yours. However, making regular deposits is for your own benefit since you can minimise the loan interest.
Since offset loans incur higher treasury costs, they are typically priced around 0.25% above normal Home Loans. However, foreign banks and major lenders have been known to offer more competitive pricing on par with regular Home Loans. But whilst they allow you to potentially pay off your loan sooner through reduced interest rate payments, they may also charge a higher rate of interest. So, again, it is important to compare both of these factors to assess the overall impact on the cost of your Home Loan.
If you keep making regular deposits, whilst your monthly payments are unlikely to reduce, it will devote a greater amount of your payments towards paying off the principal. This means you should be able to pay off your Home Loan sooner.
Offset loans could be a valuable option to save money on your interest payments, particularly if you have surplus funds which you can contribute towards reducing interest payments. Bajaj Finserv offers a range of Home Loan options with low Home Loan rates.