According to Mohan, replacing a standard loan with an OD loan and moving idle money into it from your savings account can result in huge savings. Yes, the money you move to an OD account won’t earn any interest, as it would in a savings account, but it will help you save on interest the bank would have otherwise charged you on your outstanding loan. By forgoing 4-6% savings-account interest, you are essentially saving 8.25%, the interest on home loan.
Also read: How you can cut costs of holding demat accounts
Why not simply prepay the loan outstanding with the surplus, you may wonder. That’s because the idle cash parked in the OD account that reduces your loan interest outgo can be withdrawn at any time and for any reason.
“Since interest is calculated on a daily basis, even if you park your surplus at the start of the month and withdraw some of it by the end of the month, you would still save some interest compared to a regular home loan account,” said Mohan, who founded Emisaver.com. According to his calculations, even ₹5 lakh parked in a Maxgain type home loan account can save ₹18 lakh in interest over the tenure of a 25-year home loan.
Home loan maximising
Hyderabad resident Ankur Pathak (43) bought his first flat in 2014, for which he took a regular home loan from HDFC Bank. He got to know about SBI Maxgain through a fellow resident of his society. He then did his own research and thought it would be worth it.
“The new loan was priced only slightly higher to the HDFC ROI. I had to incur some additional cost of transferring the loan to the new bank, too. I did some calculations which suggested that the interest saving with my available surplus parked in the Maxgain account could cover the additional expenses in two years and the rest could be profit. I went ahead with it,” he said.
Pathak saved ₹5,000-10,000 in interest every month using Maxgain versus a regular home loan, without sacrificing liquid cash. “In 2021 I switched back to the conventional loan because my surplus grew to ₹20 lakh while my outstanding balance was ₹40 lakh. Meanwhile, the interest rate differential between regular and Maxgain account had reached 0.50 bps (basis points). I prepaid ₹15 lakh and made use of a lower interest rate in the regular account. It is all about what works for you in a given situation,” he said.
Also read: Why lifetime-free credit cards deserve a place in every card portfolio
Pathak plans to buy an under-construction property for ₹1 crore soon. “I have decided to go with Bank of India’s home loan OD account because the interest rate differential between regular and OD accounts in their case is nil,” he said.
Pune resident Venkatesh Rahatkar (32) chose Bank of India’s home loan OD account in 2023. “I got to know about it at a banking expo. The best part was the EMI remained the same in the regular and the OD account. It was ₹29,000. In the regular account, the interest-principal break-up would have been ₹25,000- ₹4000. It is ₹23,000- ₹6,000 in the OD account. If I withdraw some money the break-up will change, but broadly my interest cost will be lower in the OD account,” said Rahatkar.
What are the risks?
Maxgain and similar products are not without their downsides. First, the interest rate are a bit higher than those of regular term loans. The idea is to choose an OD account for which the interest rate premium is the lowest compared to what you would get in a regular home loan account. You also need enough surplus money to park in the OD account, without which no significant gain is possible.
“A few people even transfer their monthly salary into the overdraft account, spend using credit cards, and then clear their credit card bills by transferring the funds back. That way they squeeze more out of this facility,” said Abhishek Kumar of Sahajmoney, a Sebi-registered investment advisor in Bengaluru.
However, it’s important that you only use only idle cash for this. Don’t compromise your investments. “If you have a long-term outlook you can invest surplus funds in, say, equity mutual funds, as you can earn more than what you would save on loan interest. Finding that balance is important,” said Kumar.
Also read: Mutual funds engineer new category in quest for tax-efficient debt funds
Second, the EMI is fixed and the outstanding balance drops over time, reducing your ability to deposit extra funds. Here’s an example. Let’s say only ₹38 lakh of your ₹1 crore home loan is outstanding after 20 years. You have a surplus of ₹40 lakh from accumulated savings. In this case, you can deposit a maximum of ₹38 lakh and cut the interest charged to zero (the entire EMI goes towards paying the principal). However the additional ₹2 lakh is of no use to you. You will need to actively track your loan journey so you can close your loan early or convert it back to a normal loan to optimise savings.
If you cannot track it actively, a regular home loan is better for you. “There are many ways to achieve home loan savings. A voluntary EMI hike of just 5% annually is an achievable, simple, and powerful accellerant. Similarly, pre-paying 7% of your loan balance once annually can help pay off a 20-year loan in 10 years. Salaried borrowers like home loan ODs for the interest savings. However, it requires financial savvy to understand the net benefit of loan interest savings against the loss of returns on the emergency funds parked in the OD. In BankBazaar simulations, the net returns are minimal in the first year of the loan but improve over time,” said Adhil Shetty, CEO, Bankbazaar.com.
OD home loan for stock investments
Amit Upadhyaya, a former tech executive in Pune, who retired early to live off his investments, had a different use case. He strategically withdrew money from his SBI Maxgain home loan account during the pandemic to invest in stocks. The subsequent market rally helped him accumulate a larger corpus than anticipated and retire early. The 8-9% interest was a lot cheaper than any other kind of borrowing, whether personal or credit card loans or even margin funding. Financial planners advise strongly against borrowing to invest but Upadhyaya took a calculated risk and it paid off.
Also read: The art of investing in equity markets—when and how to sell?
Others like Upadhyaya may be tempted to use this money to invest in the stock market. Essentially it amounts to borrowing money cheap (8-9%) for possible returns of 12% or more. However this can easily backfire in a falling market. If you then default on the loan, the bank can not only seize your house but also initiate legal action for misusing the loan, so do it at your own risk.
However, for a conservative investor who is willing to move a part of his emergency corpus – otherwise parked in a liquid fund or savings account – into the home loan account to reduce the interest outgo, this strategy can indeed pay off.
