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If you are planning to take a home loan and are confident of generating surplus funds regularly after paying the EMIs, you can opt for loan schemes with an overdraft facility. This will not only cut interest payments significantly but will also reduce the loan tenure.
What is a home loan overdraft?
Under this scheme, you can deposit surplus funds into your home loan account and this will be considered as a 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.
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
- A good option for homebuyers who have surplus amount
- Facility to withdraw surplus money anytime
- No penalty for prepayment of the loan amount
- Reduces interest liability, when extra funds are deposited
Who should not opt for an overdraft?
If you are not able to generate a regular surplus amount, a normal home loan is sufficient. This is because home loan overdrafts are on average 25 basis points more expensive compared to a regular home loan. Also, the overdraft facility may not work in your favor if you don’t use the OD account for regular transactions. You should ensure that your routine banking transactions are carried out via this account. So, before proceeding you must ascertain whether your budget allows you to take advantage of the home loan OD in the long run. The surplus amount deposited here does not qualify for Section 80C rebate, as it is not treated as pre-payment. So it is advised to park only the amount over and above the tax-deductible interest portion. Interest saved is not deductible under Section 24 and is shown as available balance.
Popular home loan overdraft schemes
Many banks offer OD facility on home loan to save interest. Some of the popular home loan overdraft schemes are :
- State Bank of India – SBI MaxGain
- Axis Bank – Super Saver Home Loans
- Citibank – Home Credit
- Bank of India – BOI Star Smart Home Loan
- IDFC Bank – Short and Sweet Home Loan
- Standard Chartered Bank – Home Saver
Difference between regular house loan and home loan overdraft
|Regular Home Loan||Home Loan Overdraft|
|Interest is calculated on the outstanding principal of the loan amount.||Interest is calculated on the book balance (principal outstanding) on a daily basis and is debited at the end of the month. Excess amount from the monthly payment is considered as available balance.|
|The surplus amount used for repayment is permanently deducted from your account.||Surplus funds can be withdrawn at any time.|
|Pre-payment reduces outstanding principal balance.||Pre-payment increases your available balance and reduces your book balance.|
|Home loan is considered closed when the outstanding amount is zero.||The book balance reaches zero when the entire amount is paid off. You can still withdraw from your account or visit a bank to close your account.|
|Suitable for those who can manage EMI better.||Suitable for those who have surplus amount as regular income.|
Conclusion : Home loan overdraft is a good option for people who have surplus regular income. Used judiciously and in a planned manner, it can significantly reduce your total interest outgo. However, not all banks offer this facility. The ones currently offering this scheme include State Bank of India, Citibank, PNB, Standard Chartered Bank, Axis Bank and IDFC Bank.