Home loan is undeniably a long-term financial commitment that requires careful consideration before taking one. A lot of factors come into play towards the repayment of a home loan.There are plenty of home loan options, catering to the type of customers. Overdraft is one of the most popular facilities in a home loan that is sought after by individuals who wish to pay off the home loan faster. Although it is a great option for repaying a home loan faster, overdraft facility does not work for everyone. Are you interested to know what overdraft actually means and if it will work for you. Read on to know all you need to know about Home Loan Overdraft Facility.
What is Overdraft Facility in a home loan?
Overdraft is generally an extension of credit from the lending institutions wherein the borrower is allowed to deposit funds over the loan amount and make withdrawals as per requirement. The terms and conditions apply as already agreed.
Overdraft facility in a home loan is much similar to that. The lender provides you with an account with an overdraft limit which is usually equal to the outstanding home loan amount. You can make the repayment of the loan by depositing money into the account. Any excess deposit is considered a prepayment which reduces the outstanding principal and the interest outgo on the loan. You are also allowed to withdraw as per the limit and repay with interest.
How does an overdraft facility in a home loan work?
When you opt for home loan overdraft facility, your home loan account will be linked to your current or savings account. All your repayments are deposited in your home loan account. Any amount more than the EMI is considered prepayment towards the home loan. The excess amount cuts down your principal outstanding and thus reducing the interest payment on the home loan. The more you deposit on the home loan account, the sooner you will be able to repay the home loan. You can directly transfer the funds from savings account to your home loan account.
As you are able to add extra amount to prepay the home loan, you are also allowed to withdraw money from your home loan account. Any amount withdrawn will have to be repaid with applicable interest. The amount withdrawn means increasing your home loan principal and repaying with interest. Each borrower who opts for overdraft facility is eligible for up to a certain limit wherein the withdrawal can be made. Beyond the limit, withdrawals are not allowed. It is usually up to 25% of the loan amount. However, it may vary depending on the bank’s internal policies.
The amount withdrawn from the overdraft facility can be used for any personal purposes of the borrowers. It can be used for education, wedding, buying consumer durables, gadgets, household appliances, etc. One can also continue to use the overdraft facility even after the home loan is fully repaid. The interest charges are applicable as per the terms and conditions.
Now you may wonder, how to withdraw money through home loan overdraft facility. Your home loan account will be linked to your savings or current account. Whenever you wish to withdraw money from the overdraft account, you can transfer it to the savings account. This is very much like obtaining a loan from a bank. The repayment or tenure will be restructured after the withdrawal is made or excess amount is deposited. Apart from that, some lenders do provide cheque books, ATM-cum-Debit cards exclusively for the overdraft account to conduct all sorts of transactions.
As the overdraft facility provides flexibility, the interest rates are slightly higher than the regular home loans.
Advantages of Home Loan Overdraft Facility
Overdraft facility is beneficial to borrowers who wish to repay the home loan much faster by cutting down on interest payment. Following are some of the advantages of opting for an overdraft facility in a home loan.
You can reduce the principal outstanding by making extra payment over and above the EMI.
Interest saved is interest earned. By parking extra amount, you can save a lot by cutting down the interest on home loan which is usually higher than a risk-free saving scheme.
The borrower can withdraw amount from the overdraft facility for emergencies or any other financial requirements as and when required.
Prepaying or part-paying a home loan taken on fixed interest rate will incur prepayment charges which is prevented by opting for an overdraft facility. You can park little or surplus amount and reduce the outstanding principal.
Disadvantages of Home Loan Overdraft Facility
While overdraft facility has a host of benefits to the borrowers, it also has some drawbacks if not used thoughtfully. Following are some of the disadvantages of opting for home loan overdraft facility.
This option becomes ineffective if you are unable to park amount over and above your home loan EMI as the interest rates are higher than regular home loans.
The home loan overdraft facility does not qualify for a tax deduction under the Income Tax Act Section 80C.
As you have the option of withdrawal, it can cost you dearly if you happen to withdraw a lump sum for emergencies.
Not several banks offer overdraft facility as they lose their income of interest payment. Moreover, the banks offering this facility have stringent rules and terms. Some lenders allow only a certain percentage of amount to be parked in the overdraft account.
It curtails you from investing your money in long-term saving schemes which may bring higher returns than the money saved through the prepayment.
Who can opt for a home loan overdraft facility?
Home loan overdraft is a good option for individuals who have surplus money. If you have a double income in your family, you can opt for this facility as you can park the extra funds towards prepayments. Businesspersons who have surplus money can opt for this facility and enjoy the benefit. Moreover, they can withdraw money when needed for business purposes. Salaried individuals who would get a bonus or increment can opt for this option to pay off their home loans faster.
Who should not opt home loan overdraft facility?
As we have already seen that home loan with an overdraft facility carries a higher interest rate than regular home loans, individuals who will not have excess amount can stay away from this option. Hence before proceeding with this plan, you must do a cost benefit analysis.
If you are looking for tax rebate on your home loan, you must not opt for this as overdraft does not qualify for tax benefits. On the other hand, you may invest your money in a tax saving scheme that also provides higher returns.
Additional Reading: Income Tax Deduction For Interest On Home Loan
Financial Institutions That Provide Home Loans With Overdraft Facility
Due to the losses in overdraft facility, many financial institutions do not provide this option. Only a handful of lenders provide this option with much stringent policies. Following are some of the top lenders who offer home loan overdraft under various names.
SBI MaxGain Home Loan
Provided by State Bank of India, this home loan facilitates an overdraft account which can be used for withdrawing and parking excess funds. The borrowers can avail cheque book, ATM-cum-Debit card along with this loan to conduct the transactions. The interest rate on this home loan overdraft ranges between 8.75% to 10%. Women borrowers can get a concession of 0.05% on the interest rate.
Punjab National Bank
Punjab National Bank provides overdraft option under Housing Finance Scheme for Public. Under this scheme, one can get a minimum of Rs. 50,000 and a maximum of Rs. 25 Lakhs as limit. However overdraft limit above Rs. 5 Lakhs is restricted to 25% of the home loan amount. The eligibility is determined based on the repaying ability. The interest rate on the scheme is one year MCLR + 3.50%. There are no processing fees for taking this scheme. However, there is a documentation charge of Rs. 450.
Axis Bank - Super Saver Home Loan
Under this loan scheme, the minimum loan amount is Rs. 50 Lakhs and there is no ceiling on the upper limit. The interest rate for loans up to Rs. 75 Lakhs 9.20% and for loans above Rs. 75 Lakhs, it is at 9.35% per annum.
Citibank - Home Credit
Using Citibank’s Home Credit Overdraft account, one can transfer funds across Citibank and non-Citibank’s accounts, pay utility bills, pay credit card bills, etc. You will be provided with a ATM-cum-Debit card and a cheque book along with this account.
There are two overdraft options given by Citibank namely,
Home Credit Vanilla Option: It gives you the option of maintaining liquidity.
Home Credit Fast Track Option: It helps you clear the home loan faster.
Standard Chartered Home Saver
This home loan with overdraft facility by Standard Chartered comes with an interest rate of 9.31%. Under this option, you can get a free debit card and facility to withdraw funds whenever you require for all sorts of emergencies and utilities.
Factors to Consider While Opting for a Home Loan With Overdraft Facility
It would look enticing when you think of closing your home loan faster with an overdraft account. But you must also be aware that it can turn against your financial prosperity. There are few factors to consider while opting for a home loan with an overdraft account.
You must bear in mind that an overdraft account is for disciplined individuals. As you have the option of withdrawal, you may tend to misuse the funds which can hurt your financial plans.
Cost Benefit Analysis: If you are an individual who has too many financial obligations, opting for an overdraft account may not work for your favour. It is for individuals who can contribute excess funds than the EMI.
Due to meagre profits, not many banks are offering this facility. Moreover, the banks offering this have stringent policies. Hence before taking a home loan with an overdraft facility, read the terms and conditions carefully to enjoy maximum benefits.
Certain lenders provide overdraft account only for properties that are already built and not for the purchase of plots and construction.
The interest rates on home loan with overdraft facility is slightly higher than the regular home loans as it offers you the convenience of prepaying the home loan without any charges.
Differences Between Regular Home Loan and Home Loan with Overdraft Facility
|Regular Home Loan||Home Loan with Overdraft|
|The repayment made towards the home loan is permanently deducted by the lender.||The surplus amount parked can be withdrawn again for personal usage.|
|The interest is calculated on the outstanding principal.||The interest is calculated on a daily basis based on the balance on the account.|
|If you make a part-payment or prepayment on the home loan, it reduces the outstanding balance.||The prepayment increases the withdrawal balance and reduced the outstanding principal amount on the home loan.|
|The loan account remains closed when the outstanding principal is completely paid off. It cannot be used again.||The overdraft account remains active when the outstanding balance reaches zero. The user can withdraw funds in the future and payback with applicable interest.|
|It is best for people who can just pay the EMI without fail.||Best for individuals who can park extra funds in the account and repay the loan faster.|
|The user can get tax rebate under Section 80C.||The borrower who has opted for this facility is not eligible for tax deduction under Section 80C of the Income Tax Act.|
Five Things to Know About Home Loan Overdraft Facility
Extra funds deposited in the overdraft account is treated as prepayment towards the home loan.
Excess amount helps reduce the interest outgo on the loan.
Interest on the home loan is slightly higher than the regular home loans.
Home loan with overdraft facility does not qualify for income tax rebate under Section 80C.
Withdrawal facility helps in getting low interest loans.
Is home loan overdraft facility better than a personal loan?
When an emergency strikes, most individuals would think of taking a personal loan which is easily available based on the credit profile. Though it is easily available, it can become a debt burden as the interest rates are higher. On the other hand, having a home loan with an overdraft account can be beneficial to you.
The interest rate on a personal loan ranges between 11% to 32% which is higher than all the other loans. But a home loan with an overdraft account comes with an interest rate that ranges between 8.75% to 11% which is way cheaper than a personal loan.
The interest rate on a personal loan is charged for the entire loan amount. But in an overdraft account, the interest rate is applicable only to the amount withdrawn.
A personal loan is an obvious choice when you do not have a home loan with overdraft facility.
Home loan with an overdraft facility is a good option as it gives you the flexibility to withdraw funds and park surplus money to reduce the debt burden. However, it is best suitable for individuals who can save extra through various incomes or who have double income in the family. For others who find it difficult to manage their monthly expenses, it is recommended not
to opt for this facility.