All there is to know about home loan overdraft facility

All there is to know about home loan overdraft facility

A home loan is a long tenure loan which can last for over 20 years. But most people typically hope to repay, at least a part of the loan before the actual tenure. Also, part prepayment helps them save on paying those extra instalments with interest on the principal loan amount. However, if you use off your funds to prepay your loan, and need a sum of money when you are faced with a financial emergency, you cannot access the amount you used to prepay a part of your loan. Thankfully, banks and housing finance companies make it possible for you to deal with these problems by offering a unique facility called the home loan overdraft facility. Here’s all there is to know about it.

What is overdraft facility in home loan?

To understand how overdraft works in case of home loans, we need to first understand what the term means in general. Overdraft is a facility typically offered by banks to their account holders in which the latter can withdraw or ‘overdraw’ amounts from their bank account exceeding the balances in their account at a given time. The amount overdrawn is subject to a predetermined maximum borrowing limit and interest rate as specified by the bank.

Now, in the case of home loan overdraft, your home loan is linked to a dedicated savings or current account by your lender. The borrower has the option to deposit any surplus amounts of fund into this account as and when he/she pleases, just like it is done in a basic savings account. After deducting the home loan EMI payment, the surplus amount is treated as prepayment towards your housing loan. This amount is deducted from the principal loan amount when interest is calculated.

What makes overdraft facility in home loan special?

Opting for a home loan with an overdraft facility comes with several benefits. Unlike prepayment in case of a regular home loan, the borrower can withdraw surplus funds from his home loan overdraft account as and when required. When funds are withdrawn, the amount withdrawn is added back to ‘effective principal’ amount, used in calculating interest. Also, the loan EMI amount also stays the same. Moreover, interest calculation is done on a daily based depending on the outstanding principal loan amount on the day you use the overdraft facility and interest is debited at the end of the month in one go. As such, any surplus amount your deposit into this account and deducted from the principal loan amount is considered interest free, effective immediately.

Benefits of overdraft facility in home loan

There are several advantages of opting for home loan overdraft facility. These advantages are best enjoyed by loan applicants who have more than one sources of income i.e. spouses serving as co-applicants on home loans, business owners, professionals with regular surplus funds and so on.

Ability to repay the loan before the stipulated tenure: The more money you deposit in your loan overdraft account, the more your interest outgo starts to diminish. Since the EMI remains unchanged throughout the loan tenure, you have more money in your overdraft account that you can use to adjust against the principal and repay your loan before the stipulated loan tenure ends.

It is highly liquid: Your home loan overdraft account works the same way as your savings bank account i.e. you can withdraw and deposit funds into it as per your convenience. The funds in the account are available to you all the time and you can conduct your daily transactions from it. You can prepare to repay your loan before tenure or use these funds whenever you need.

You can withdraw the surplus: If you are faced with a financial emergency, you can withdraw your surplus amounts anytime from your home loan overdraft account. This is not possible if you have a regular home loan with no overdraft facility.

Apart from the above mentioned benefits, the borrower is also not subjected to any prepayment penalties if he opts for the overdraft facility. However, as a borrower of a high-value loan like a home loan, it in your best interest that you read all the terms and conditions of the loan agreement before you opt for the home loan overdraft facility