Use savings to prepay your loan

In the times of rising interest rates, promising to return part of one’s interest amount is a perfect pitch for new home loan borrowers. However, some smart number crunching could see the borrower save much more than what HSBC India’s ‘pay-back loan’ scheme offers.

The scheme has been launched for new home loan customers. It offers to pay back 50 per cent of the interest paid, on the 12th, 24th and 36th equated monthly instalments (EMIs). The bank says the offer is its way to reward loyal home loan customers.

So, at an interest rate of 10.75, the cumulative refund over three years works out to Rs 1,26,529, for a Rs 1-crore loan.

Home loans are structured to include higher interest payments in the early years and higher principal payments in the later. So, there is no denying the savings on interest.

In terms of interest rates, HSBC India’s prevailing rates are competitive, with the 10.75 per cent offered for loans above Rs 75 lakh, lower than State Bank of India’s 11 per cent. However, this advantage may be nullified following the next round of rate rise. A 50-bps rise will see the rate rise to 11.25 per cent within the first six months of the loan. And, according to the conditions that apply, delay in even a single EMI would translate into no further repayments from the bank.

Home loan consultants suggest the savings from the interest payment can be used to repay the loan through part-prepayment. The savings of Rs 1.26 lakh, if used for a one-time pre-payment, will reduce the interest burden. That is, the Rs 43,631 one gets as interest refund for the first year, can be used to make a prepayment. Or, one could increase their EMI in anticipation of this windfall. This will also reduce the interest burden.