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13 APRIL, 2022
The mortgage market has undergone a lot of changes in recent years. There have been numerous developments in the way lenders offer convenience on home loans and evaluate applications. One such feature that often creates confusion among borrowers is the home loan overdraft facility. As a borrower, you might have come across the concept of an overdraft facility on a home loan, and if yes, you might want to know if it's worth.
If you are trying to decide whether to take out a home loan with an overdraft facility, you must understand the concept and know how these loans work.
What is a home loan with an overdraft facility?
Many lenders provide a credit facility with a home loan, which is called an overdraft facility. You can deposit funds over and above the loan EMI and withdraw the amount as per your need. When you avail the overdraft facility, the lender opens an account linked to your home loan. You can deposit any amount of money in the account as EMI. If you withdraw the amount from the account, you need to repay it with interest.
Let's look at the pros and cons of an overdraft facility.
As explained earlier, the surplus fund is deposited in your linked account. This linked account could be a savings account or a current account. When you submit an amount more than the EMI amount in the linked account, it is considered as prepayment. This prepayment submitted against outstanding principal helps reduce the overall interest cost of the home loan.
Depositing surplus funds in the linked account helps in two ways. One, you do not spend off the surplus fund and it rather goes as prepayment. Secondly, you have liquidity in the overdraft facility. You can deposit and withdraw the surplus funds from the overdraft account as and when needed. You do not get this flexibility in foreclosure or partial prepayment of the home loan.
Lenders charge a high prepayment fee on fixed interest home loans. However, though the surplus funds are treated as prepayment, no prepayment fees are charged.
Typically, lenders charge a higher interest rate for home loans with overdraft facilities. Therefore, it is only beneficial if you have a significant surplus to deposit in the overdraft account. Otherwise, you could end up paying more than you benefit from it.
Being considered as prepayment, the surplus fund deposited offers no tax benefit. Moreover, it might not be wise to avail an overdraft facility when you can earn high-interest rates by investing your surplus funds.
Weigh the pros and cons of a home loan overdraft facility carefully before deciding. You must be cautious and closely scrutinise the amount that can be saved on the total outgo. If you do not save enough surplus funds, you might instead pay a higher amount. It is essential to read the terms and conditions carefully before opting for any facility to make an informed decision. Using a home loan EMI calculator while availing the loan can help you determine your savings and EMI amount.
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