The home loan overdraft facility allows the borrower to use the advance as a savings account and transfer surplus there. The advantage is that no interest is charged on the home loan to the extent of the extra money kept in the account. Under this scheme, you can deposit surplus funds into your home loan account and this will be considered as prepayment against the principal. If you have been making regular deposits to the account, your outstanding principal would proportionally reduce. The interest is calculated on the outstanding principal. Minus the savings deposited in the home loan account, over and above the EMI. Moreover, you also have the option to withdraw this money as and when required.
How does it work?
In a home loan with an overdraft facility, the bank links a dedicated current or saving account with your home loan account. The borrower can park any extra funds in this account whenever he wants, just like he puts money in a savings account.
Any additional money, over and above the EMI, parked in the account is treated as pre-payment towards the home loan. This effectively brings down the overall loan liability and the interest is charged only on the balance loan amount.
What’s more, you retain the option of withdrawing that sum of money you parked additionally as and when required.
Factors to consider, while taking a home loan overdraft
The extra amount repaid against the home loan, is not eligible for the rebate under Section 80 (C), as it is not considered as a prepayment. Consequently, experts recommend that applicants should first conduct a cost-benefit analysis, to determine whether a prepayment is cheaper or if the savings on interest substantiate the added premium that you have to pay for this feature.
Advantages of a Home Loan OD facility
Home loan overdraft is a good option for double income families that have surplus income or businessmen who get regular surplus funds. The biggest advantage of this scheme is the liquidity it offers. The surplus amount in the home loan overdraft account is available for withdrawal any time, and you also have the same flexibility of repayment, when you get funds. In fact, even if you are already servicing a regular home loan, you could look at switching to banks that offer overdraft-linked home loan schemes.
Here are the main advantages of an OD facility
- Offers greater liquidity on the deposited amount
- Good option for home buyers who have surplus amount
- Facility to withdraw surplus money anytime
- No penalty for prepayment of loan amount
- Reduces interest liability, when extra funds are deposited