Most people today take home loans to purchase a new house, mostly because of lack of funds, and sometimes for tax efficiency. Today the market is flooded with variants of home loan products from banks and housing finance companies, each with its own bells and whistles.
One popular home loan product from India’s largest lender State Bank of India is the SBI MaxGain Home Loan product. It has become so popular that it has steadily attracted more homebuyers in the past two years than any other product.
In this post, I will discuss why this product is unique, and what has the SBI put on the table for the home loan takers that they are lapping it up. First, we must know that this product belongs to the Home Save Loan product category.
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What are Home Saver Loans?
A home saver loan is operated not by one but two accounts – a usual loan account and another called an excess account. The names of these accounts may be different for products from different lenders like for SBI MaxGain, the excess account is called an overdraft account.
The loan account is the account that has your actual loan disbursal from the bank and shows the balance of the outstanding amount.
The excess or the overdraft account allows you to park your money just like a savings account. Any savings on interest from the loan account will also get credited to this account. Just like a savings account, you can also withdraw money from this account at any time.
As per rules for reducing balance loans, like a home loan, the interest component is calculated every month on the outstanding principal sum. If you have a balance in your excess/overdraft account then the outstanding principal for that month is considered at a reduced amount, and you can save on the interest payment. The EMI remains the same, but any savings on interest are adjusted towards your principal.
SBI MaxGain Home Loan Review
As discussed above, the SBI MaxGain overdraft facility operates like a savings or current bank account. SBI offers an overdraft account alongside the loan account and customers can deposit their excess money in the account to reduce their interest payout.
Since the overdraft account can operate as a regular saving or current account, the borrowers can withdraw the money parked in it anytime as per their needs. Just like a regular bank account, the SBI offers a checkbook, ATM-cum-Debit card, and Internet banking facilities against the overdraft account, making it easier to operate.
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How does it work?
This overdraft account facility allows users to park their temporary surplus, like from a bonus or sale of an asset, in the account and get the benefit of reduced interest payout (on their home loan) for that duration.
The balance in the overdraft account is treated as your collateral against the home loan balance. As it is in the form of a bank deposit, it has 100% face value. The SBI gives you the benefit of maintaining additional collateral with them.
Let us understand the scheme with the help of an example.
Let’s say you took a 20-year home loan of Rs. 50-lakh at 9% p.a. rate, and the complete amount is disbursed on day 1. The regular EMI comes out to be Rs. 44,986. This EMI has interest and principal components in it.
As is the case with any loan, initial payments have more interest components than the principal. In a regular home loan, your EMI schedule for the first two months would look like this:
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A Regular Home Loan
Interest Component: Rs. (50,00,000 X 9%)/12 = Rs 37,500
Principal Component: EMI – Interest = Rs. 44,986 – 37,500 = Rs. 7,486
Outstanding Principal: Rs. 50,00,000 – 7,486 = Rs. 49,92,514
Interest: Rs. (49,92,514 X 9%)/12 = Rs 37,444
Principal: EMI – Interest = Rs. 44,986 – 37,444= Rs. 7,542
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The SBI MaxGain Home Loan
Let’s assume you had a spare Rs. 5-lakh that you do not have use for right now, and you decide to park them in the SBI MaxGain’s overdraft account on day 1.
Your outstanding principal amount = Loan Amount – Overdraft balance
Rs. 50-lakhs – 5-lakhs = Rs. 45,00,000
Interest Component: Rs. (45,00,000 X 9%)/12 = Rs 33,750
Principal Component: EMI – Interest = Rs. 44,986 – 33,750 = Rs. 11,236
Outstanding Principal: Rs. 50,00,000 – 11,236 = Rs. 49,88,764
Saving on Interest: Rs. 37,500 – 33,750 = Rs. 3,750
Now, suppose you withdraw Rs. 1.5-lakhs from the overdraft account on day 1 of the second month, leaving your balance at Rs. 3.5 lakhs. The interest and principal component in the EMI for the second month would be calculated as follows.
Your outstanding principal amount = Loan Amount – Overdraft balance
Rs. 49,88,764 – 3,50,000 = Rs. 46,38,764
Interest: Rs. (46,38,764 X 9%)/12 = Rs 32,166 (rounded-off)
Principal: EMI – Interest = Rs. 44,986 – 32,166 = Rs. 12,820
Outstanding Principal: Rs. Rs. 49,88,764 – 12,820 = Rs. 49,75,944
Saving on Interest: Rs. 37,444 – 32,166 = Rs. 5,278
As is apparent from the examples, this scheme can reduce your home loan burden much faster with more interest savings in the early tenure of the loan.
Pre-payment v/s SBI Maxgain Overdraft
Pre-payment of loan means early repayment of a part of the principal outstanding. This results in a reduction in the tenure of your loan, but the EMI remains the same. But, as we saw from the example above, by keeping a substantial sum as collateral, you get the same benefit of reducing your “effective” outstanding principal for computation of the interest component in each EMI. You are thereby reducing your principal indirectly.
One more crucial difference is liquidity. When you pre-pay a loan, the money is gone forever, and no matter what you cannot use it for any other purpose. With the SBI MaxGain overdraft facility, you get the same benefit as the pre-payment of the loan, without losing on the liquidity front.
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Advantages of SBI MaxGain Home Loan
The SBI MaxGain home loan scheme offers a host of advantages to borrowers, some of them are:
- Park your surplus money from an annual bonus, sale of assets or stocks, and reap the benefit of reduced interest burden for the period.
- No pre-payment, file charges, or registration charges unlike prepayment of home loans. No additional documentation is required, the complete process is automatic.
- Always maintain liquidity and withdraw at any time using an ATM card or Internet banking, for any use.
- Lowers the interest payment on a home loan, and increasing the principal payment on it, thereby reducing your tenure faster.
- The money deposited would be tax-free up to the amount equivalent to the home loan amount.
- The overall yield is better than other deposits as the interest paid to the bank is always higher than you will save.
- NRIs and professionals with higher income can fully utilize this option to their advantage.
Hope this article gives you a good idea about SBI Maxgain – if you have any questions add them in the comment section.