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Shanthi Venkataraman

HERE is a product made for the compulsive saver. Birla Home Finance's "Easy Fixed Plus" has you saving to pay your home loan from Day One. What is more, the scheme of payment is such that you enjoy a substantial tax benefit during the earlier years of your loan tenure.

The product

The home loan is available for six-14 years at an annual fixed rate of 7 per cent. During the first half of the tenure, the EMI (Equated Monthly Installment) is broken up into a pure interest component and a savings component. The savings will earn an annual interest of 5 per cent. At the end of the first phase, the savings plus interest is used to settle a part of the principal. Consequently, your interest in the second half is substantially lower and so also the EMI.

For instance, if you take a Rs 1 lakh loan for 14 years, the EMI for the first seven years will be Rs 1,084 per lakh. Of this, Rs 584 is the interest and Rs 500 is treated as savings. At the end of seven years, you would have accumulated Rs 45,000 by way of savings and the interest earned on it. This will be set off against the principal outstanding on your loan. The remaining seven years, you would pay a lower EMI, as the principal will be lower.

What this effectively means is that you get to partially pay off your loan in the middle of the tenure, and do so without attracting a prepayment charge.

Your total outflow would be lower than that of a conventional loan. Also, as you pay only the interest amount in the first half of your tenure, you get a substantial tax benefit in the initial years. But with an ordinary home loan, where the EMI comprises both principal and interest, the latter declines, while the former rises over the loan period, reducing the tax benefits as the loan ages.

Should you go for it?

The product, however, does not provide much room for flexibility. The EMIs compel you to save towards loan repayment and you cannot use this sum to meet any other expense.

This means, if you want to save to meet other contingencies, you would have to do so separately. The other factor is that your savings under the plan will earn only a 5 per cent interest. You may be able to generate higher returns if you save on your own. In other home loan products, your principal outstanding will reduce with each EMI you pay. Here you have to note that since you only pay interest, you get to prepay your principal only at end of the first half of the loan tenure. If you happen to come into some money and wish to pay a part of your loan, you may have to bear a prepayment charge of 2 per cent, if the amount prepaid is greater than 30 per cent of the principal.

With other home loan products, such as HomeSaver by Standard Chartered Bank, you can direct surplus funds to your home loan account, as and when you like, offsetting the principal. This lowers your interest burden and gives you the flexibility to direct your funds to meet different requirements.

Birla Easy Fixed Plus does appear to be fairly attractive if the loan is taken for a long tenure. Also, the tax benefit that you gain on your interest payments is also a point in favour of the product. Going for the product may help those of you who are debt-averse sleep better, knowing that you would be well placed to settle a good part of your liability in a few years.

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