To make prepayments easier and more convenient for the Home Loan borrowers, some leading banks now offer a Home Loan Overdraft Facility. Under this facility, any amount that you deposit in your Home Loan account over and above your stipulated EMI is considered to be a prepayment towards the loan. This amount then gets subtracted from your outstanding loan amount, and your tenure and interest going forward, is adjusted accordingly.
On the other hand, if you are ever in need of money, you can also withdraw the amount from your account, and use it as needed. In this case, your outstanding loan amount will increase accordingly, and so will the interest that you ought to pay. This can come in handy as you launch your startup.
To put it simply, the Home Loan Overdraft facility can be considered quite similar to a current account, in the sense that it allows you to deposit additional money (in excess of your EMI), in your Home Loan account, as and when you can. This money is then treated as a part of the principal repayment, unless it is withdrawn from the account.
You can make any number of deposits and withdrawals during the loan tenure, thus enjoying the much needed flexibility, while paying off this big ticket loan.
Difference between Regular Home loan and Home Loan with Overdraft Facility
Calculation of Interest
In case of a regular loan like RBL Home Loan, the interest is calculated on the outstanding principal amount after every EMI payment. In account with an overdraft facility, the interest is calculated on the book balance on a daily basis and is adjusted in accordance with the excess balance, over and above the EMI, available in the account.
When a surplus payment is made towards the account, it is considered as a pre-payment and gets permanently deducted from the account. On the other hand, a Home Loan account with overdraft facility allows you to withdraw the surplus payment as and when required.
Home Loan Closure
In a regular account, your Home Loan is considered closed, when the outstanding loan amount becomes zero. In the account with an overdraft facility, even when your outstanding balance reaches zero, you are entitled to withdraw any amount that you had deposited in surplus of the EMI payments. The lender will only close your account, once you authorise it.
A regular Home Loan account best suits the needs of people with a fixed income such as salaried individuals, who are better equipped to make fixed payments every month. A Home Loan with an overdraft facility is more suitable for people who expect surplus income on a regular basis.
Advantages of a Home Loan Overdraft Facility
As must be clear to you by now, a Home Loan with overdraft facility is ideal for people with excess incomes or dual-income households. This specialised Home Loan account comes with an impressive set of advantages, the most significant ones are listed below-
- High liquidity on the surplus deposits
- No prepayment penalty
- Reduced interest liability on deposit of additional funds
- Beneficial for homeowners with additional cash influx
- Limitation of Home Loan Overdraft Facility
While the Best Home Loan Providers in the country do not levy any explicit fee for the Home Loan overdraft facility, they offer Home Loan at a slightly higher interest rate, as compared to a loan without the facility.
In the case where the borrower is not confident of making prepayments on a consistent basis, this facility may prove to be a costly affair. Hence, it is essential for every borrower to do a cost-benefit analysis regarding this facility, before making the final call. Only if the savings on the interest outgo is significantly higher than the additional cost of the loan should one opt for the Home Loan overdraft facility.
Since this facility invites an increased interest rate by an average of 25 basis points; you should only opt for it, if you are doubly sure of being able to deposit surplus funds, time and again, and benefit from the reduced interest liability. If you are unsure of being able to use this facility, it is best to avoid paying extra for OD. Instead, you can make prepayments towards your regular account.
Then again, you should remember that the surplus payments made towards the account with overdraft facility will not attract tax benefits since it is not considered as prepayment, but simply as an additional deposit. Hence, while your interest liability will reduce, you will end up losing out on the tax benefits.
If you decide on opting for this facility, go ahead and confirm with your lender whether they offer the same. If you are already servicing a Home Loan, and wish to enjoy the perks of this facility, then you may even place a request to make a switch!
Hope this handy guide will help you make a well-informed decision with respect to your Home Loan.