Does home loan overdraft benefit all borrowers?

how it works

In home Loan Overdraft facility, a lender opens a savings or current account which is linked to the home loan account. This account is designated to accommodate deposits made by you and withdrawals requested on your behalf later.

Under the facility, any surplus deposited by you is treated by the lenders as prepayment of the principal amount. Like a regular home loan, interest on an overdraft loan is also calculated based on the outstanding principal of the loan amount.

However, the interest is calculated on a daily basis and varies on the basis of the outstanding principal each day. Depositing any extra funds in an overdraft account reduces the interest you pay and the term of your loan. However, the EMI remains unchanged.

Apart from prepayment, overdraft scheme provides liquidity from the account when there is a financial need. The loan amount and tenure are adjusted accordingly. So, this plan doubles up as a prepayment option and a liquidity avenue. However, before opting for this option, keep in mind that any increase in the home loan outstanding amount may lead to interest outflow, and there may be a limit on how much you can borrow from the overdraft account.

Adil Shetty, CEO, BankBazaar.com said that when you decide to go for the home loan overdraft scheme, your lender will link your home loan account with your current or savings account. The monthly installment (EMI) you pay every month to repay your home loan goes into this home loan account. You prepay your home loan whenever you deposit an amount more than your regular EMI. This prepayment reduces your outstanding loan figure and lowers the applicable interest rate. “So basically, if you have any amount lying in your savings bank account, you can transfer it to your home loan account so that you can pay off your loan faster,” Shetty said.

You can also withdraw money from the overdraft account whenever you want, as it is linked to your current or savings account. You can also transfer money from this account to your other savings account if needed. Overdraft account acts as an approved loan from the lender. Every time you make a withdrawal from the overdraft account, the repayment period gets added to the outstanding principal. The interest charged on withdrawal is the same as that of an overdraft home loan.

Shetty said, “The process of withdrawing is similar to depositing additional funds in your home loan account. Keep in mind that withdrawal may increase the outstanding loan amount, which you will have to repay along with interest.”

Raj Khosla, Founder and MD, MyMoneyMantra.com said, “The rate of interest on advances disbursed through home loan overdraft facility is a notch higher than the rate of interest charged on regular home loans. Typically, the rate difference can be between 20-50 basis points.”

Limitations: This can be a costly option for you as the interest rates are usually higher than your regular home loan interest rates. Ratan Choudhary, Head, Home Loan Paisabazaar.com said, “Since the Home Loan Saver option offers more liquidity and flexibility than regular home loans, banks and housing finance companies usually charge slightly higher interest rates for this facility. “

Shetty said, “Home loan overdraft facility does not provide tax deduction benefit under section 80C for prepayment of home loan principal. This is because the excess amount deposited in the home loan account with overdraft facility is subject to taxation. From the point of view the principal is not considered repayment.”

Who should choose it?

Experts suggest that home loan overdraft can be a good option for a businessman with seasonal receivables and payable amounts. Having an overdraft account handy can help when you need money quickly and when you have short-term surplus liquidity. Khosla says, “Salaried individuals with high incomes and expecting a large percentage increase in their respective annual income can also take advantage of overdrafts on home loans, thereby setting up an opportunity fund for themselves. In addition, those tenure One can also prepay the amount before completion and save a huge chunk of interest charges.”

mint tech

Home loan overdraft works for those who want flexibility and are willing to accept the disadvantages of higher interest rates and tax benefits. If you are planning to opt for this plan, you should first do a cost-benefit analysis to understand its impact on your actual savings.