Will a home loan overdraft work for you?

When it comes to taking a home loan, borrowers have to consider numerous options – different interest rates offered by various banks (which may be fixed rate, floating rate, or semi-fixed rate), in addition to eligibility and tenure. Now, several banks are also allowing the flexibility of using the home loan as an overdraft account.

 

 

How does a home loan overdraft work?

The home loan overdraft scheme, is similar to a current account with an overdraft limit, explains Adhil Shetty, CEO of BankBazaar.com. “You can deposit any surplus funds that you have, into your home loan account and this surplus will be considered as prepayment against the principal.

“The amount on which the loan interest is calculated, is the outstanding principal, minus the savings deposited in the home loan account over and above the EMI. If you have been making regular deposits to the account, your outstanding principal would proportionally reduce.

“This brings down the overall loan liability,” Shetty elaborates.

In an overdraft loan, the interest is calculated based on the outstanding principal of the loan amount, just like a regular home loan. However, it is calculated on a daily basis and is debited at the end of the month. So, it varies, based on the outstanding principal. Prepaying the loan brings down the interest you end up paying, as well as the tenure of the loan.

The EMI remains unchanged.

 

When to opt for the home loan overdraft?

“The home loan overdraft facility is a good option, if you are sure that you will be able to save some extra money every month, after paying the regular EMI. It is also good for self-employed people, who have access to short-term liquidity,” says Rishi Mehra, CEO, Deal4Loans.com.

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Experts explain that the biggest advantage of the home loan overdraft scheme, is the liquidity that it offers. If you make part payments against your regular home loan, it reduces your outstanding principal but this money will not be available to you again. However, with the overdraft scheme, the surplus amount in the home loan overdraft account is available for withdrawal any time.

“The home loan overdraft is an appealing scheme for double-income families. It is also especially useful for businessmen, who are in a moderately secure financial position with access to regular surplus funds, as they can withdraw the surplus when needed, without opting for a personal loan,” says Ajay Jain, executive director and head – real estate, Centrum Capital. “The facility offers flexibility in repayment as well. On the other hand, it is not suitable for people who just manage to meet their regular EMIs and are unable to earn surplus income. In this case, it is better to stick to a normal home loan, as one with an overdraft facility is slightly more expensive, by about 50 basis points,” Jain points out.

 

Factors to consider, while taking a home loan overdraft

The extra amount repaid against the home loan, is not eligible for the rebate under Section 80 (C), as it is not considered as a prepayment. Consequently, experts recommend that applicants should first conduct a cost-benefit analysis, to determine whether a prepayment is cheaper or if the savings on interest substantiate the added premium that you have to pay for this feature.

 

Financing institutions that offer home loans with overdraft facility

Several banks in India provide the home loan overdraft scheme. These include SBI, Punjab National Bank, Bank of India, Citibank, Standard Chartered Bank, HSBC and IDBI Bank, among others.

 

Home loan overdraft benefits

• Offers greater liquidity on the deposited amount.
• Good option for home buyers who have surplus fund inflows.
• Reduces the interest liability, when extra funds are deposited.
• Facility to withdraw the surplus money any time.
• No penalty for prepayment of loan amount.

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