What is a home loan with an overdraft facility? Five things to know about itJuly 26, 2022 . Home loans . 10 min read
There are several factors that come into play during the repayment of the loan. Amongst all the home loan facilities, the overdraft is one of the most prominent ones. It is especially popular among people who wish to pay off their mortgage faster. If you are interested in knowing more about the home loan with an overdraft facility and whether this is the right option for you, keep reading.
A home loan is undeniably a long-term financial commitment that requires thorough research before opting for one. Banks and financial institutions now offer different home loan options to meet the demands of different customers.
What is a home loan overdraft facility?
An overdraft is generally a credit extended by the lending institution wherein the borrower is allowed to deposit funds on top of the loan amount and make withdrawals whenever the requirement arises. The terms and conditions of the usage of the overdraft facility are agreed upon beforehand.
A home loan overdraft facility is very much similar to this. An account is opened by the lender in your name with the overdraft limit that is usually equal to the outstanding home loan amount. You can repay the loan by depositing the funds in your account. If you make any additional deposit apart from the fixed monthly EMI, it is considered a pre-payment. The excess amount will automatically lower the loan’s outstanding principal and the interest amount. You can also withdraw money up to a certain limit from this account and pay it back with interest.
How does a home loan overdraft facility work?
When you opt for a home loan overdraft facility, your current or savings account is linked with the loan account. All the EMIs towards the loan will be deposited in the home loan account. Anything over the EMI amount will be considered as the pre-payment towards the home loan. The excess amount will reduce the outstanding principal amount and hence cut down your interest amount as well. The more you deposit in the home loan account, the faster you will be able to repay your loan amount. Funds from the savings accounts can be directly transferred to the home loan account.
The overdraft facility allows you to make a withdrawal from the home loan account whenever the need arises. Any amount that is withdrawn will have to be repaid with the applicable interest rate. Withdrawing from an overdraft facility means increasing the home loan principal amount and repaying the borrowed amount with interest. The withdrawal limit from the overdraft is fixed based on the bank’s internal policies and cannot be exceeded. The amount withdrawn from the overdraft facility can be used for personal purposes such as education, wedding, purchase of gadgets, household appliances, etc.
Five things to know about an overdraft facility
Keep these 5 things in mind before opting for a home loan overdraft facility.
- An overdraft facility is a credit agreement between you and your bank that permits you to use or withdraw more money than you have in your account, up to a pre-approved limit. Overdrafts are very liquid and the banks will allow you to withdraw money as many times as you wish.
- The line of credit is typically granted based on the account holder’s balance and as pre-sanctioned loans against assets including bank fixed deposits, stocks, and bonds offered as collateral. The approved overdraft limit and the interest rate amount will differ based on the nature of the asset supplied as collateral.
- The overdraft facility gives the borrower the flexibility to manage cash flow. But this benefit can sometimes cost you much more. Overdraft home loans are of higher interest as compared to traditional loans making them more expensive in the long run.
- The overdraft works in a similar manner as a pre-approved loan. You can withdraw the money from the overdraft account whenever needed and the interest will be applicable on the amount withdrawn and for the time duration, it was borrowed.
- Taking an overdraft home loan has many advantages for small business owners and individuals with short-term cash flow issues, however, the negative balance needs to be paid back within a month.
A home loan overdraft facility has its own advantages and disadvantages. As the facility is becoming popular amongst borrowers, it is important to conduct a proper cost-benefit analysis before making any decision. The analysis would help in understanding whether a home loan with an overdraft facility is more suited to you as compared to a traditional home loan.
Generally, a home loan with an overdraft is suited more for individuals who often have surplus funds available with them. Going through the terms and conditions of the lender and weighing the pros and cons can help you make an informed decision.
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