What is a Home Loan Overdraft?

Most home loan borrowers try to clear their debt before time since it reduces the total interest payout as well as the loan tenure. However, when a borrower deposits any surplus as prepayment, it reduces cash in the bank savings account, which can be used for emergency withdrawals.

An efficient way to use your surplus funds towards prepayment yet have liquid funds to meet financial emergencies is a home loan overdraft.

Home Loan

Home loan overdraft is an innovative solution that enables the borrower to park surplus funds in the savings or current account linked with the loan. This overdraft account is taken as a prepayment towards the loan. The amount of the surplus funds is deducted from the loan principal.

The overdraft facility comes with several benefits. These benefits are most suitable for loan applicants who have more than one source of income.

  • Lower home loan interest rates

The additional money you deposit into the overdraft account, over and above the EMI, is considered a prepayment towards the home loan. As a result, the overall loan liability comes down, and the interest is charged only on the balance loan amount.

  • Repay the loan before the specified tenure

As you deposit more money in the overdraft account, the interest payout starts to reduce. While the EMI remains constant throughout the loan tenure, you can use the additional funds in your overdraft account to reduce the principal and clear off your loan earlier than the specified loan tenure.

  • Enjoy liquidity

The overdraft account is the same as your savings account. This means that you can withdraw funds as and when required. The funds are always available, and you can meet your daily expenses using the funds parked in it. You have the flexibility to choose whether you want to use the funds for prepayment or for when you need them.

  • Withdraw the surplus when needed

When you encounter a financial emergency, you can use the funds lying in the overdraft account. It is not possible to do so if you have a home loan without an overdraft facility.

  • Avoid prepayment penalty

Lenders can levy prepayment charges on fixed-rate loans. However, a home loan overdraft facility helps borrowers avoid prepayment penalties. The additional money lying in the overdraft account serves as a prepayment against the outstanding principal.

While there are many benefits of an overdraft facility, there are also some downsides. The surplus funds deposited in the account do not qualify for tax savings as per Section 80C of Income Tax. This is because the funds are not treated as prepayment.

In conclusion

If you want to apply for a loan to buy a house, opt for a reputed lender. Home loans are a perfect solution to fulfill your home buying requirements. You can use the home loan EMI calculator to plan the tenure and repayment structure for your loan.

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