Pros & Cons of Home Loan Overdraft Facility - Kotak Bank

30 AUGUST, 2019

Home loan borrowers put many efforts to pay off their loan before time as it decreases the total interest as well as the tenure on loan. There are many effective ways to manage the long term financial liability of home loans, such as floating interest rates, pre-payment, and so on. One such means is the overdraft facility on the home loan account.

What is an overdraft facility?

The over-draft facility on the home loan is just like the over-draft limit on the current account. You can deposit the additional funds you obtained into your home loan account. The surplus amount will be considered as pre-payment against the principal of your home loan. With the help of an overdraft facility, you can decrease the tenure period and home loan interest payments. . The EMI remains unchanged when you use the overdraft facility. In a way, the overdraft facility on home loan brings down the overall loan liability.
The overdraft on loan is dependent on the outstanding principal. Just like a regular home loan, the interest is calculated on the basis of the outstanding principal of the total home loan amount. Why should you get the home loan overdraft?

The part payments made on your regular home loan decrease the outstanding principal, but you will not be able to use the money. On the contrary, the additional amount you paid on the overdraft home loan account is available for you to withdraw as per your wish.

Getting an overdraft facility on home loan works in your benefit when you have the assurance that you will be able to save extra money every month over and above EMIs. The liquidity offered by the home loan overdraft scheme is the best advantage of it.
Pros of home loan overdraft facility

  • Overdraft facility is a very effective way of repaying home loans for the people having fluctuating income.
  • With overdraft facilities, borrowers can regularly deposit surplus money in the loan account which in turn reduces the interest cost.
  • Borrowers can pay the home loan in a shorter time without paying any pre-payment charges.
  • Overdraft facility gives borrowers flexibility to use the amount from their loan account

Cons of home loan overdraft facility

  • The interest rates on home loans with the overdraft facility are comparatively higher than a regular home loan.
  • Savings have the potential to earn higher returns on them. Therefore, getting an overdraft facility on a home loan means giving up the savings for early payment of the loan, which may not always be a financially wise move.
  • The overdraft facility is not applicable for tax deduction benefit under section 80C.

An overdraft facility can be a financially savvy move when you have surplus funds available with you. The main advantage of an overdraft facility on a home loan is that it brings down the interest pay-out on your home loan.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.