Should you choose a home loan that lets you cut your interest with surplus cash?

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₹40 lakh. She is clear about choosing a floating-rate loan and wants to repay it in under 10 years by making regular pre-payments whenever she has surplus cash. When Sunita approaches the bank with which she has a long-standing relationship, her relationship manager (RM) offers her a proposition.

“There’s a type of home loan that lets you temporarily park surplus cash in the loan account and the outstanding principal is reduced by an equivalent amount, thereby reducing the total interest on the loan. The best part is that you don’t actually have to part ways with your liquid cash, unlike a prepayment, and you can withdraw the deposited amount anytime you want," the RM says. “Really? What happens to the outstanding principal when I withdraw the surplus cash?," asks Sunita.

“Well, the interest will be recalculated after increasing the outstanding loan by the amount withdrawn. But the upside is that you will have used your surplus to partly reduce the overall interest you pay on the loan," explains the RM. “But I can park the money in a fixed deposit and earn interest on that," she counters.

Also read: Why SRK's home-buying guide doesn't apply to everyone “Yes, but the FD interest rate will most likely be less than the rate you will pay on the loan. You can get a higher rate with a long-term FD, but in that case your money will be locked away for several years, right? And if you break the FD prematurely, the bank will charge a foreclosure penalty and you won’t earn the full interest either. Let me give you another perspective.