(Updated March 2018)A smart home loan for a the smart borrowerIn January 2017, Bank of Baroda introduced a new set of home loan interest rates – based on credit scores of customer. You can now take a home loan with Bank of Baroda at 8.30% per year. Currently no other bank offers home loans at this rate. We reviewed the credit score based interest rate Baroda Home loan previously. In this post, we will take a look at another product from the stable of Bank of Baroda – Baroda Home Loan Advantage.Bank of Baroda Home Loan Advantage Baroda Home loan advantage is a product that blends traditional home loan with a savings account. When you take a home loan under Baroda home loan advantage, you would need to open a new savings bank account linked to this home loan account. This will be a Zero-interest savings account. This means, you would not be earning any interest on the balances in this savings account. Yet the savings account comes with a huge advantage. The bank will calculate home loan interest on the loan outstanding (minus) balance in the linked savings bank account.So while this account doesn’t pay any interest, it effectively pays interest at the home loan rate which is more than twice of what any savings bank account would pay! Let’s say you have earned a bonus of Rs.50,000. If you don’t want this money to be blocked, you could keep it in a regular savings account. This would earn you a return of 4% per annum. That is about Rs.2000 a year. Instead, if you kept Rs.50,000 for a year in the home loan linked savings account, you would be saving interest at the rate of 8.30% per annum, i.e Rs. 4,150. That’s more than double the money! Baroda home loan advantage EMI calculator Baroda home loan advantage is an offset home loan product. So any amount that you save in your linked savings account, would reduce your interest burden.You can see the difference in an example.Let’s compare a regular home loan product vs Baroda home loan advantage. Loan value – Rs.40 Lakhs Interest rate – 8.5% per annum Loan tenure – 240 months Regular home loan repayment schedule showing first 20 months out of 240 months
You will pay a total interest of Rs. 43.31 Lakhs. If you maintain a balance of Rs. 1 Lakhs for just two months during the loan tenure, you total interest will come down to Rs.36.14 Lakhs. With just two payments in month 2 and month 18, your total interest paid comes down to Rs. 37.83 Lakhs. The difference is over Rs.7 Lakhs!!
What you need to note, is that savings are high if you park the money for long. So while you can withdraw money freely from this linked savings account, you should try and keep the balance as long as possible.
Is Baroda Home Loan advantage for me Owning a property and servicing a home loan is a very expensive matter. It takes a lot of effort and a number of years to regularly save and pay off your loan. So, you should use every option to save your hard earned money. Currently, Bank of Baroda is the only bank offering an interest rate of 8.35% per annum. So this in itself makes it a good option.Home loan for salaried individuals Baroda home loan advantage is a great product for you, if you can save money regularly and keep it in the savings account. If you are salaried, you may be able to supplement your savings with lump sum payouts like bonus every year. Even in the early years of your career, you may be able to save some funds every month.. The effort will go a long way in saving interest over the long term.Home loan for lawyers, doctors and others self employed If you are a professional like doctor, lawyer or self employed in any other way or if you run a business, this makes a great home loan interest saving option. You may have circulating funds, that you could park in the savings account for some time. You don’t even have to worry about keeping an SB account balance on first and last days of the month. Any savings in the linked SB account would help reduce your interest pay out.The Bank of Baroda advantage Lowest home loan interest rateMost banks charge a slightly higher interest rate on their hybrid products like this one. However, Bank of Baroda home loan interest rates are the same for their regular term home loan and Baroda Home loan advantage, This means, you could be eligible for an interest rate of 8.30% per annum on your home loan.Here’s the home loan interest rates based on credit score:
Rate of Interest
760 & Above
Less than 760 but above 725
MCLR + 0.50% (8.80%)
Less than 725 but above 675
MCLR + 1% (9.30%)
No borrowing record
MCLR + 0.50% (8.80%)
Interest rates are changed at the discretion of the bank
If you have been regular with all your loan repayments in the past, then your score could easily be above 760. You can find out your CIBIL score free of cost here. This means firstly you are getting a home loan at the lowest interest rate. On top of this, you can save more interest if you can put aside money regularly in the linked savings account. You can read more on credit rating and scores and re-look at your credit history.
Savings in Baroda Home loan Vs other investments Parking your money in a savings account and reducing your interest is a good option if you have some surplus funds.
If you are in the habit of saving, you would typically invest in fixed deposits or investment instruments like equity, gold, etc. You would then be facing two options:
Take regular home loan and invest savings elsewhere
Take Baroda home loan advantage and keep funds in linked savings account
The decision is entirely based on the opportunity cost of money involved. Simply put, you chose an option that saves or makes you more money.
Baroda home loan advantage will be a sensible option, as long as home loan interest rate is more than the return on any other investment. So if you were to compare some of the options you have:
6.5% per annum (1 yr rate SBI)
Other savings account
4% per annum (SBI basic savings account)
Average return on equity shares
16% per annum over past 5 years
Average return on gold
-2% per annum over past 5 years
5 year Post office recurring deposit
7.2% quarterly compounded
It is possible to get high returns over years on equity and equity mutual funds. But for that you would have to invest in a regular and disciplined manner. It also takes some amount of monitoring and proactive management to generate good returns in equity. But despite everything, returns from equity comes with uncertainty.Other than equity, an offset home loan product is a good option for anyone who can save some amount every year. Since home loan interest is calculated on the difference, you would effectively save 8.35% per on the balance kept in the linked savings account. Money saved, is money made!An exception to this, is if you have other debts more expensive than your home loan.Typically credit cards dues, personal loans, auto loans, private loans, loan against gold etc are more expensive than home loans. If you have such a loan, it is possible you are paying interest in the range of 12%-24% every year. In such a case,you would be better off paying back this loan instead of parking the savings in the bank.In fact, if you have expensive debts like these, it would be a good option to take a home loan with a top up. While you use the basic loan value for your home, you could use the top up for closing off all the unwanted loans.Liquidity with Baroda Home Loan AdvantageBaroda Home loan advantage linked savings account does not give you any interest on money saved. However, the money that you do save here is completely accessible. You can use this savings account just like any other. For young professionals, this must come as a big relief. In the early working life, it is usually difficult to block a large part of your savings. So it becomes difficult to put a large sum in fixed deposits or long term investments. In turn, the returns you make will not be very significant in terms of actual money. In this light, a product that lets you have unrestricted access to your savings would be quite a good option. This way, even if you are able to keep aside a large amount for some duration every year/month, you would be savings some interest on your home loan.Prepayment and Baroda Home Loan AdvantageWhen you take a home loan, you end up paying a lot of your savings on interest. So if in some year you earn a bonus or have some windfall gains, it makes sense to consider repaying some part of the loan. However, if you may need this money some time in future, home loan advantage account comes very handy. When you put this money in the linked savings account, you would be saving interest. Whenever you need to use this money, you can always withdraw.
Tax benefit from Baroda Home loan Under the income tax laws, if you earn more than Rs.10,000 interest on your savings account, you would be taxed based on your slab. At the prevailing rate of interest, if you keep more than Rs.2,50,000 in a savings account, you would be attracting taxes.
Baroda home loan advantage offers you a zero balance savings account linked with its home loan product. This means, you would not be technically earning any interest on the funds in this account. So there will be no tax due.
Added to this, there is always the benefit of tax deduction on home loan principal and interest paid during the year.
How to make most of your Home Loan Baroda home loan advantage or any offset home loan product are a good option if you have a habit or resources to save funds regularly. If you are in the early stages of your career, you may not be in a position to lock your funds in long term savings. In such a case, a free-access savings account that can also helps you save home loan interest can be a boon. A great option is to maintain the linked savings account as your salary account.
Many people also like to have two savings account – one for their expenses and one where they can put away money for vacations, school fees, large purchases etc. If you are one of them, you could use the linked savings account to put away money for such purposes. Until you need to withdraw the money for your reserved expense, you would have saved some home loan interest!
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