Hi All,
I am back after a short break ,a refreshing vacation ,lots of positive energy and a whole lot of fresh new ideas. Here we go.There is a very important topic I missed talking about earlier.
“Where should the funds for emergency be Parked?”
An emergency fund is called a “Contingency fund “.It is supposed to be easily available to us in cases of emergency .Ideally ,the size of the fund depends on our age . Its generally around 4 months to 6 months of living expenses. Since we do not know when a contingency can arrive , we should hold a portion of our funds in the form of easily available instruments and then only plan to invest our surplus funds further.
As rightly said , India is a country with a very good savings ratio. Every individual , be it in any income group, has an intention to save and tries to do the best . During my conversations , I have realized a common pattern .We know we should save , but maximizing its potential is not their key concern at this stage . Our general tendency is to hold money in our savings accounts . Because that gives us a sense of security .
A savings account pays an interest at a rate ranging from 4% to 7% ( depending on banks).
Then which options are available to individuals ,which can ensure liquidity and at the same time also give us better return than savings?
There are many , and we shall discuss about the first of the lot today. A Home Credit Account .
Introduction :
Most of us would be servicing a home loan . Among home loans , there is a product available which takes the home as mortgage and provides an overdraft account against it .This is usually called a home credit account.This means ,we get a current account which gives us a withdrawable limit equal to the loan amount sanctioned to us . This account also provides us with a cheque book and ATM card facility , so its as good as any of our accounts .
How does it work :
Whenever we have surplus money , if it was a regular home loan, we would think twice before we use the surplus to prepay the home loan .We assume this amount maybe required in the near future . When we face such a dilemma, a home mortgage account comes to our rescue. We can park the surplus in such account . The home loan interests nowadays are ranging from 10% and above . So ,when we hold the amount in this account, for the holding period , its treated as though our principal outstanding is lesser .Thereby , in the EMI , lesser interest component gets deducted and more of principal component gets debited .
This on any day is beneficial to us .
Benefits :
- The money does not get locked in or paid off. Hence its available for withdrawal as and when we need it .
- Instead of getting a meager interest as in savings account, this accounts helps us to save an equivalent of 10-12% on home loan interest . eg ,Consider a home credit account of Rs 25 lakhs and we have completely taken disbursal of 25 lakhs @ 11% for 20 yrs . The EMI is Rs 25805 . The first EMI adjusts Rs 22917 towards interest and 2888 towards Principal . We have a surplus of Rs 2.5 Lakhs and we park in the account for the 1st month. Then Rs 20625 goes towards interest and remaining Rs 5180 gets adjusted towards Principal. Next month, you have lesser Principal Outstanding and there is a small reduction in interest payment for future months also ,which is again a save.
- Some of the products like SBI MAX GAIN ,do not charge any additional rate for choosing this option . So, there also is no question of additional cost .
- In today’s age when purchase prices of properties are increasing , inevitably we have to take some portion as loan to buy our dream home. Planning for the home atleast 5 years in advance can help us save a larger sum for down payment and reduce this loan burden . However , whatever loan we are taking , we will stand to benefit if we choose home credit account against a standalone Home Loan.
Note :
The Home Credit account is beneficial in terms of parking surplus funds only post possession of property .During the under construction stage, since the whole amount is not disbursed completely , any amount parked in such an account, may not be allowed to be withdrawn . This depends on terms and conditions of the home loan provider and needs to be studied and comprehended correctly .
Please feel free to write back in case of any queries. It may not be related to this topic ,but remember that every such query will bring with it an exchange of new ideas and information .(a win-win for both of us)
Thanks
Best Regards
Deepa
image source : Quizzle.com
Deepa Nittala 