There are several options when it comes to choosing the home loan best suited to you. Several Indian banks are now offering innovative schemes that are worthy of consideration. One of the newer schemesoffered is home loans with an overdraft facility.
What is different about this home loan?
This type of loan involves depositing a surplus amount in the loan account at the end of the month,after paying the monthly EMI. This surplus amount is applied towards reducing the original principal (actual loan amount taken). Once the principal is reduced, the interest payment correspondingly reduces.
Can I withdraw from this surplus amount if necessary?
Yes, the customer has the option of liquidity in case he/she needs the money. In fact, this type of loan account works best when it is used for regular banking transactions.
What are the advantages of an overdraft facility on a home loan?
One, the interest burden is lower than regular home loans as the surplus funds are used towards reducing the principal. Future interest payments are made on a steadily decreasing principal amount.
Two, it is more tax-efficient because the interest savedis not taxable. If you invested those same surplus funds in a fixed deposit, for example, you would have to pay tax on the interest earned.
Three, the greater the surplus funds in the account, the quicker the principal and interest gets repaid, thus reducing the overall tenure of the loan.
What are the disadvantages of the overdraft facility?
The main disadvantage is the higher interest rate on these loans. It can be upto 25 basis points higher than a normal home loan. The consumer needs to balance the higher interest rate against savings from future reductions in interest payment.
Two, the customer needs to keep a surplus amount that corresponds to 2-3 EMIs for this type of loan to be financially worthwhile. A lower surplus amount will not lead to any significant reduction in the principal or interest, while the interest cost of the loan remains higher than normal loans.
Third, this kind of scheme is viable only if the home loan account is used regularly for banking transactions. Depositing a certain amount every month into this account - even if it is not your main banking account - is also an option. This scheme is most viable if it is your regular account for transactions
How do I know if this scheme is suitable for me?
The overdraft facility on the home loan is ideally suited to double income families or those with a relatively healthy monthly inflow. Such customers are probably best able to set aside money after paying off the EMI every month. The savings in interest costs can be quite significant depending on the surplus funds retained in the account.
Even in such circumstances, the consumer must determine whether it is better to make a prepayment on the loan, instead of using the overdraft facility.
Which banks offer such loans?
Several banks offer such schemes including HSBC, StanChart, SBI and Central Bank of India. Credit Mantri can help determine whether this kind of overdraft facility is suited to your particular financial situation.