Home Loan Overdraft Facility: Introduction and Benefits
Most people who take a Home Loan, plan of repaying it before its tenure. After all, you don’t actually ‘own’ the house as long as there is an active loan on it. And paying interest for 30 years isn’t something that would fill you up with hope and excitement either. The sooner that loan clears out, the sooner you get to enjoy true ownership of the house and the lesser the amount of interest you pay. Home Loan borrowers hence make part prepayments towards the loan to achieve this objective.
However, this road is not bereft of its share of hurdles. Banks impose certain restrictions on part prepayments in the form of a cap on the maximum number of part prepayments per year or by setting minimum amount limits for prepayments. Another predicament that you may face is that once you pay an amount as a part prepayment, it is permanently deducted from your account. You cannot have it back come what may. So if you are ever confronted by a financial emergency, those funds that could have been helpful at the time become inaccessible for you. In order to deal with and provide a solution to all these problems pertaining to part prepayments, banks offer a unique facility known as a Home Loan Overdraft.
What is a Home Loan Overdraft Facility?
The concept of a Home Loan overdraft would be better understood if you know what a regular overdraft is. An overdraft is a facility through which the bank allows you to withdraw, or rather ‘overdraw’, money from your bank account over and above the account balance at that time. The overdrawn amount is subject to a maximum borrowing limit and a predetermined rate of interest.
Under the Home Loan overdraft scheme, the lender bank links your Home Loan account with a dedicated current or savings bank account. As the borrower, you have the option of depositing any surplus or extra funds that you may have in this bank account at your discretion, just like you do in a regular savings account. The surplus amount after deducting the EMI (Equated Monthly Instalment) payment is considered as a prepayment towards the Home Loan. This surplus amount is deducted from the original principal for the purpose of calculating the interest.
What makes this facility unique is that unlike in the case of prepayment in a regular Home Loan account, you have the option of withdrawing the surplus funds as and when you want. When you withdraw the funds, the withdrawn amount is added back to the ‘effective principal’ amount which was used to calculate the interest. The EMI amount never changes.
Another key feature of this facility is that interest is calculated on a daily basis based on the outstanding loan principal on that day and the total interest is then debited at once at the end of the month. So any surplus amount deposited in the account, and hence deducted from the principal amount, becomes interest-free with immediate effect.
Benefits of a Home Loan Overdraft Facility
The benefits of Home Loan overdraft facility are best enjoyed by families who have a dual source of income or by business owners and professionals who regularly have surplus funds at their disposal. You can find out more about this facility and evaluate Home Loan offers from various banks and lenders on mymoneymantra.com, one of India’s oldest and most reputed financial service providers. You could avail of the most cost-effective, low interest and speedily disbursed Home Loans that are carefully picked out for you by their team of highly skilled professionals.
Quicker loan repayment
As you keep depositing surplus money, your interest outgo diminishes and because the EMIs remain constant there is more money that could be adjusted against the principal. Hence, your loan gets repaid quicker.
The funds parked in a Home Loan overdraft account are perennially available for you to conduct your daily transactions. This provides you with a handy source for highly liquid funds.
Reduces interest liability
You do not receive any interest on the surplus amount deposited in a Home Loan overdraft account which you otherwise would have, had you invested it in a fixed deposit. However, you do ‘earn’ interest in the sense that your interest liability is reduced as a direct consequence of a reduction in the principal amount of the Home Loan.
Option to withdraw the surplus
You never know when a financial emergency may arise and you may need the surplus funds to tackle the emergency. With a Home Loan overdraft, you can withdraw the funds any time you need them, but a regular Home Loan prepayment would deprive you of such a funding source.
No prepayment penalty
If you were to take the conventional route, prepayments are subject to penalties. Under a Home Loan overdraft scheme, there are no prepayment penalties of any kind.
Tax efficient returns
Interest earned on fixed deposits and other investments is taxable. However, if you deposit your surplus funds in a Home Loan overdraft account there are no tax implications because interest is not credited in your account; you only earn it as a reduction in your Home Loan interest liability. Evaluate the terms and conditions of the scheme and ascertain your ability to make regular surplus contributions before you take the plunge!
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