Things to keep in mind if you have taken SBI MaxGain Loan

Loan Account: denotes your actual outstanding amount

Excess Account: You can put money in this account on your own. Alternatively, any interest savings from the loan EMI will be added to this account. You can withdraw from this account whenever you want (subject to fulfilment of a few conditions).

For reducing balance loan (like your home loan), interest is calculated every month on the outstanding principal. From your EMI, this monthly interest gets knocked off and anything left is used to reduce the principal amount. For more on how loan EMI payments work, read this post.

Let’s take an example.

Let’s say you take a loan of Rs 50 lakh. Assume the entire amount is disbursed on Day 1. The loan is for 20 years with the interest rate of 9 percent p.a. Your EMI will be Rs 44,986.

Principal outstanding at the beginning of the month = Rs 50 lacs

EMI= Rs 44,986

Interest for the month = Rs 50 lacs X 9%/12 = Rs 37,500

Principal repayment for the month =  Rs 44,986 – Rs 37,500 = Rs 7,486

Principal outstanding at the end of the month = Rs 50 lacs – Rs 7,486 = Rs 49,92,514

Principal outstanding at the beginning of the month = Rs 49,92,514

EMI= Rs 44,986

Interest for the month = Rs 49,92,514 X 9%/12 = Rs 37,444

Principal repayment for the month =  Rs 44,986 – Rs 37,444 = Rs 7,542

Principal outstanding at the end of the month = Rs 49,92,514 – Rs 7,542 = Rs 49,84,971

And this process goes on.

Now, let’s say you put Rs 5 lakh in your OD (excess) account on the first day.

Loan Account (Outstanding balance) = Rs 50 lakh

Excess Account = Rs 5 lakh

Under home loan saver, interest for the month is calculated on (Loan Account – Excess Account)

Principal outstanding at the beginning of the month = Rs 50 lacs  (Loan Account)

Excess Account = Rs 5 lakh

EMI= Rs 44,986

Interest for the month = (Rs 50 lacs – 5 lacs) X 9%/12 = Rs 33,750

Principal repayment for the month = Rs 7,486 (now, this is as per the original amortisation schedule. No change here)

You can see EMI is not fully utilised. 33,750 + 7,486 = Rs 41,236. What happens to the rest of EMI.

It gets added to your Excess Account. Excess Account balance at the end of the month = Rs 5 lacs + Rs 3,750 = Rs 5,03,750

Principal outstanding at the end of the month = Rs 50 lakh – Rs 7,486 = Rs 49,92,514

Principal outstanding at the beginning of the month = Rs 49,92,514 (Loan Account)

Excess Account = Rs 5,03,750

EMI= Rs 44,986

Interest for the month = (Rs 49.93 lacs – Rs 5.03 lacs) X 9%/12 = Rs 33,666

Principal repayment for the month = Rs 7,542 (now, this is as per the original amortisation schedule. No change here)

Excess Account balance at the end of the month = Rs 5.03 lakh + (Rs 44,986 – Rs 33,666 – Rs 3,778 = Rs 5,07,528

Principal outstanding at the end of the month = Rs 49,92,514 – Rs 7,542 = Rs 49,84,971

You can see principal goes down as per original amortisation schedule (unless you explicitly make a prepayment).

Keeping the money in the Excess Account does not qualify as prepayment but gives you all the benefits of prepayment and more.

If you make prepayment under a regular home loan, you lose access to the prepayment amount. It is gone. Your loan outstanding goes down.

Under the home saver loan, by keeping the money in Excess Account, you reduce the interest outgo (effectively what prepayment would have achieved). At the same time, you don’t lose access to the money. You can take out money from the Excess Account whenever you want. Just that when you take out the money, your interest gets calculated accordingly for the month. Do note your loan outstanding does not go down when you put money in the Excess Account.

Your interest saved becomes interest earned. After all, the interest savings from the EMI get added to your Excess Account. You can withdraw from Excess Account whenever you want. Had you kept the money in a savings account of a fixed deposit (instead of Excess Account), you would have earned a much lower return than the loan interest rate. Moreover, since this is your own money (and not interest), the growth in Excess account due to interest savings won’t be taxed as interest.

For these reasons, Excess account (or the OD account) makes for a perfect destination for short term or emergency funds.

Home saver loan gives the benefits of prepayment without compromising liquidity or flexibility with your money.

Under Home Saver loan, interest saved is interest earned.If there is no interest to save, there will be no interest earned. When the Excess Account balance is higher than the Principal Outstanding (Loan Account), the extra amount (Excess Account- Loan Account) does not help you save any interest. In SBI Maxgain parlance, book balance will be positive in under this situation.

Hence, you don’t earn any interest on the extra amount. Therefore, make sure that the Excess Account balance never breaches the Principal outstanding. Let’s say the loan outstanding is Rs 20 lakh. Excess Account has Rs 25 lakh. This extra Rs 5 lacs does help you with anything. You are better off keeping this money in a fixed deposit.

You need to keep an eye on Loan Account and Excess account balances. Loan account balance will go down every month as per amortization schedule. Excess Account balance will keep going up due to interest savings that get added every month. So, the difference between excess account balance and principal outstanding keeps going down every month automatically. For instance, in the example shared above, the difference went down by Rs. 11,321 in the second month.

You do not get tax benefits under Section 80C for the money that you have kept in Overdraft (Excess) account. Moreover, you do not get tax benefits under Section 24 for the interest that you did not pay (or saved).

You may have to pay a higher rate of interest as compared to a regular home loan product.

You opt for the Home Saver Loans such as SBI MaxGain to retain flexibility with your prepayment money. However, there may be certain pre-conditions before you can make withdrawal from the Excess Account (Overdraft account). For instance, under SBI MaxGain, you can’t take out money from the OD account (Excess Account) till such time you have received possession of the house. Let’s day you have parked Rs 5 lacs in your Excess Account under SBI Maxgain but you have still not received possession of your house. In such a case, you can’t take out this Rs 5 lacs from the Excess account. Defeats the purpose of the loan structure, doesn’t it?

Before those conditions are met, putting money in Excess account (OD account) is same as making a prepayment since you lose control over your money.  Other such loan products may have different pre-conditions. You must keep this aspect in mind. Till such time these conditions are met, put only that money in the Excess account that you are sure you won’t need till the expected possession of the house.

Examples of Home Saver Loan Products

SBI MaxGain

CitiBank Home Credit