When a home buyer acquires a home loan to buy a loan, usually the goal is to pay off the loan as early as possible, often before the end of the tenure, so that the total interest outgo can be reduced. This means any surplus income that one generates goes into the repayment of the home loan and that reduced the savings in one’s bank- money that could otherwise be needed during emergencies.
One way out of this problem could be to opt for the home loan overdraft facility with the home loan account. This will reduce the interest payment and the loan tenure and if needed, one will also be able to withdraw the surplus amount that has been deposited in the home loan account anytime from the bank, should an emergency arise.
What happens with a home loan overdraft?
There is, however, a small aspect to comply with. Considering the fact that this method is quite advantageous in terms of flexibility, the home buyer would also have to pay slightly higher rates of interest on the home loan as compared to a regular home loan. Hence, it is prudent to go for a cost-benefit analysis before opting for such a facility. If one is absolutely sure that at no point will one need the additional funds that will have gone towards the early repayment of home loan, then it is ideal to opt for the regular home loan procedure and not an overdraft.
After one has opted for the overdraft facility, the home loan account is linked to the savings or current account of the debtor. Any amount that is deposited in the home loan account as EMIs is paid as pre-payment of the home loan and thus reduced the outstanding balance considerably, and likewise the interest. However, just in case one suddenly finds that he or she is in need of funds, like meeting the expenses of a sudden medical emergency at home, then one can simply withdraw the desired amount of money and the outstanding balance will get adjusted accordingly.
What experts say
Amit Prakash, one of the principal partners of Square Capital, which is a Gurugram based online lending platform, has opined that the overdraft facility for home loan is almost identical to the current account with an overdraft limit where extra money can be deposited into the home loan account and this will be treated as prepayment against principal amount as long as it stays in the account.
The interest payable on the home loan is calculated on the basis of the outstanding principal amount. Once the overdraft facility has been opted for by the home buyer, a flexible repayment option comes in place and the borrower is free to deposit the surplus amount into this account. This will be immediately deducted from the remaining balance and interest will be calculated likewise. On the other hand, any amount that the debtor had deposited over and above the regular EMI amount can be withdrawn during an emergency and the balance gets adjusted again. This can be done any number of times during the loan tenure as per experts.
Advantages of overdraft facility-
This is especially good for those who have a fluctuating income cycle like self-employed people and businessman and who do not have regular salaries. The surplus money can be deposited in the account whenever it comes and it is possible to bring down the interest at that time. It is also the best way to pay off the loan early without incurring any prepayment penalties. One can retain the flexibility of the withdrawal amount from the account and that is equal to or less than the surplus amount that is deposited over and above the regular EMI for that month, and this withdrawal can also be made a later date, a facility that is not available in a standard home loan amount.
Borrowers who are opting for a home loan overdraft facility are also less likely to transfer their loan to other banks which may be offering a lower MCLR, or marginal cost of funds based lending rate. The borrowers who are not comfortable with changing their lender during a loan tenure can opt for the overdraft facility as they can still be able to use the home loan account as a transaction account which will help them with reduced interest payment at regular intervals.
On the flip side, home loans with overdraft facilities have a higher interest rate than regular home loans and it could be costlier in the long run if one does not use the overdraft facility much in the first place. The interest rates are higher by an average of 20 basis points, making it considerably more expensive than a conventional home loan.
With this facility, one will be also giving up the savings for early repayment and this could backfire if one had the potential to earn higher returns on the savings.
Also, it is important to remember that one does not get the benefit of tax deduction under 80C on additional home loan principal repayment because the surplus amount deposited in the home loan account in an overdraft account is not considered as principal repayment.
The key takeaway
So the points to consider here are that one should only opt for an overdraft facility if there are high amounts of surplus funds available. Or else, it will just become one more liability in the long run rather than being a benefit with the increased interest rates. Also, the money deposited in the home loan overdraft accounts do not pay any interest and so there is no earning from there as well, which would have been the case had the money been kept in a savings account and used for paying EMIs when required.
However, the surplus paid in the account will bring down the home loan interest and likewise the EMIs and that will also save money from another perspective and result in an indirect gain. So, it is up to the home buyer to decide whether to opt for a conventional loan or an overdraft facility, depending on his or her financial circumstances and earning potential.