When you pick a bank to borrow a home loan from, you look at various parameters like interest rate, type of interest rate (fixed, floating, semi-fixed), tenure and eligibility of the loan.
If you are looking for a home loan currently, you also consider home loan overdraft facility. If you are someone with an irregular income, the overdraft provision can be helpful, especially if you are if you are uncertain of a future emergency funding that you may require.
For example, if you get a lumpsum payment of Rs 2 lakh and use it to prepay your home loan, after the cycle of 24 EMIs, your principal amount will be reduced by Rs 2 lakh. However, if require money for a medical emergency in the following month, you cannot retract the money paid towards the home loan as it is debited permanently from the pending balance.
What is a home loan overdraft facility?
With a home loan overdraft facility, your bank will provide you with a dedicated current account that will work like any other overdraft facility. You can park money in this account whenever you have a surplus left with you like a separate saving to just pay off the home loan.
The amount you put into this account beyond the installment towards EMI is the treated as the pre-payment towards home loan while calculating the next interest installment. With this overdraft facility, you will be able to gradually bring down your total liability and the interest towards the loan.
Who benefits from the home loan overdraft facility?
If you have two sources of income like a family business along with a regular salaried job and if you can expect unplanned incomes from time to time, the facility is for you. You can use this excess income to pay towards the home loan prepayment by parking the amount in the overdraft facility. If you ever have an emergency, you can withdraw the amount over and above the EMI paid.
The home loan overdraft facility is ideal for someone with regular surplus income if you use it judiciously to smartly gradually reduce your monthly interest paid as your EMI share will get smaller with every prepayment.
Difference between home loan overdraft and regular home loan
- In a regular home loan, interest is charged on the balance of the principal of the home loan. In the overdraft facility, it is calculated on a daily basis on the overdraft balance and debited at the end of the month.
- Pre-payment of the principal amount will be available as a balance for you to withdraw and also reduced from the balance of your home loan in overdraft facility but its principal amount is permanently reduced in the case of a regular home loan.
- The home loan will remain unclosed until you approach the bank and settle the entire payment.
Things to note about the home loan facility
- If you have no problem managing regular EMIs from your salaried income and do not have many chances of generating regular surplus income then an overdraft facility is not required.
- The overdraft facility charges 25 basis points higher an interest rate than regular home loans. This means that your budget for the home loan will have to be bigger to accommodate the expense of the provision.
- The surplus amount you pay towards this overdraft account (apart from your interest) cannot be claimed for deduction under section 80C as it is not treated as pre-payment towards the loan.
- All banks do not provide this facility. Make sure to inquire before you apply for the home loan.