A loan is a contract. And a contract can be worded in any way. Minor changes in the wordings or the product structure can make a huge difference. A borrower must understand the loan structure properly before choosing among the various loan options.
During discussions with a client to finalize a home loan product, I came across home saver loans from HSBC which work in a slightly different way compared to other home saver products that I have come across till now. Let’s find out more about these Smart Home Loans from HSBC.
In this post, I focus on the Home Saver feature.
HSBC Smart Home Loans: 2 Variants
HSBC offers Smart Home Loans in 2 variants.
#1 Variant A (Smart Home Loan WITH Commitment fee): You can put only 25% of the sanctioned loan amount in the Overdraft account (Excess account). On any excess, the bank will charge a commitment fee of 1% p.a. on the excess in the Overdraft account.
Let’s say your sanctioned loan amount is Rs 1 crore. In this product, you can keep only 25% of the sanctioned amount in the Overdraft account i.e., Rs 25 lacs. While any excess would still reduce your interest outgo from the EMI, the bank would charge a penalty of 1% p.a. on the excess.
Let’s say you keep Rs 30 lacs in the account. The entire Rs 30 lacs would reduce the interest liability for the month. In other words, the interest is calculated on the Principal outstanding – OD account balance. Just like for other Overdraft home loan products (or home saver such as SBI Maxgain). However, on this excess Rs 5 lacs (Rs 30 lacs – Rs 25 lacs), the bank would charge a commitment fee of 1% p.a.
So, if your loan interest rate is 8%, the first Rs 25 lacs in the OD account saves you 8%. The excess Rs 5 lacs saves you 7% p.a. (loan interest rate of 8% – commitment fee of 1% p.a.).
Note that the maximum OD balance is 25% of the sanctioned loan amount (and not the outstanding home loan amount).
#2 Variant B (Smart Home Loan WITHOUT Commitment Fee): This is your plain vanilla home saver (OD home loan) product. You can keep as much as you want in the OD account. In home saver loans, interest saved is interest earned. Therefore, it makes no sense to keep more than the loan outstanding amount. Excess amount does not save any interest. Thus, you don’t earn any returns on any excess over the loan outstanding amount.
HSBC Home Saver Is Slightly Different from SBI Maxgain Loan
In home saver products, the interest saved is added to the OD account. Principal outstanding goes down as per the amortization schedule.
Addition to OD account = EMI – Principal repayment during the month (as per amortization schedule) – Interest for the month
Thus, the OD account balance keeps increasing.
In this Smart Home Loan product from HSBC, the interest saved gets adjusted against the principal outstanding.
i.e., Principal Repayment for the month = EMI – Interest for the month
Nothing gets added to the OD account automatically. Any interest saving (because of OD balance) reduces the principal.
That’s how it should be. Any interest savings should be used to reducing principal. SBI Maxgain is unnecessarily complicated.
This is better understood with the help of an illustration. Let’s see how the balances would look in SBI Maxgain and HSBC Smart Loan after a month of payment.
- Loan: Rs 1 crore
- Interest Rate: 8%
- Loan Tenure: 20 years
- EMI: 83,644
- In both the cases, we put Rs 25 lacs in the OD account on Day 1.
|SBI Maxgain (Month 1)||HSBC Smart Home Loan (Month 1)|
|EMI||Rs 83,644||Rs 83,644|
|Interest Payment||(Rs 1 crore – Rs 25 lacs) * 8%/12 = 50,000||(Rs 1 crore – Rs 25 lacs) * 8%/12 = 50,000|
|Principal Repayment||Rs 16,977 (as per original amortization schedule)||Rs 83,644 – Rs 50,000 = Rs 33,644|
|New OD balance||Rs 25 lacs + 83,644 – Rs 50,000 – Rs 16,977 = Rs 25.17 lacs||Rs 25 lacs (unchanged)|
|Loan Outstanding||Rs 1 crore – Rs 16,977 = Rs 99.83 lacs||Rs 1 crore – Rs 33,644 = Rs 99.66 lacs|
Note that in both the cases, the loan would get repaid in the same number of months. However, as I mentioned, HSBC structure is much simpler and easy to understand.
In HSBC Smart Home Loan, OD balance does not increase every month (unlike SBI Maxgain) as the interest savings get adjusted against principal outstanding. Thus, you won’t breach the limit simply because of EMI payments.
Which HSBC Smart Home Loan Variant Should You Choose?
Everything being the same, you would pick Variant B. Why? Because Variant B gives you more flexibility. You can keep up to loan outstanding in the OD account. But everything is not the same.
In Variant B, you must pay a higher rate of interest than Variant A. 40 bps more.
Therefore, while Variant B provides more flexibility, Variant A gets you a lower rate of interest.
How do you pick between the two? Tricky question. Home saver loans are about flexibility in handling ifs and buts. Therefore, the answer will depend on your requirement.
Let’s say you take a Rs 1 crore loan. Variant A (25% max in OD account). Interest Rate: 8% p.a. Loan Tenure: 20 years. EMI of Rs 83,664. As per the loan T&C, you can keep a max of Rs 25 lacs in OD account without paying any penalty (commitment fee). If you keep Rs 25 lacs in OD account from day 1, you will be able to repay the loan in 139 months. I assume that you will square off the final Rs 25 lacs of principal from the OD balance of Rs 25 lacs. Now, if you want to keep money in the OD account to meet your emergency requirements and think that Rs 25 lacs will be sufficient, then there is no need to go for Variant B. Variant A is better since you pay a lower interest rate.
On the other hand, if you feel that you need to keep a bigger buffer (say 60 lacs) in the OD account for any reason, you might be better off with Variant B. Note that you pay a higher interest rate in Variant B for the entire loan tenure (unless you switch from Variant B to Variant A later by paying a fee).
Therefore, if you have the excess only for a few weeks or months, you are still better off with Variant A. On the excess over specified limit (Rs 25 lacs in this case), you will earn 1% less because of the commitment fee (penalty). That should be fine.
To summarize, you are better off with Variant A in most cases. Plus, if you are planning to close your home loan soon, the flexibility benefits of Variant B over Variant A will come down gradually. However, if you must keep a bigger amount in the OD account for a long time, you may consider Variant B.