What is a Home Loan Overdraft Facility? - Overview, benefits & limitations

Taking a home loan is a significant financial commitment, as a good portion of your income could be allocated towards paying EMIs. Banks understand the challenges borrowers face, and as a result, they offer various benefits.

One such benefit is the home loan overdraft facility. It's an enhancement to the traditional home loan structure that allows you to deposit surplus funds into a designated account linked to the loan. But how would adding surplus funds to an OD account help you in your home loan financing journey? Let's find out.

What is a home loan with an overdraft facility?

A home loan overdraft facility allows borrowers to deposit and withdraw surplus funds. In this facility, the borrower's account is linked to a designated savings account by the lender.

Any surplus funds you deposit are treated as a prepayment towards the loan, resulting in lower interest on the outstanding loan balance. This helps reduce your overall liability, as interest is levied only on the remaining balance.

Your OD account also permits you to withdraw funds as needed, which can be used for significant expenses such as medical emergencies, home-related costs, or weddings. Your loan is adjusted accordingly to accommodate these withdrawals.

How does an overdraft facility on a home loan work?

An overdraft facility is beneficial for you if you are confident about saving additional funds on top of regular EMI payments. Once you opt for the overdraft scheme, you can directly transfer surplus funds from your savings account to your home loan account.

The interest payable on the home loan is calculated based on the outstanding loan amount. Therefore, the more funds you deposit, the quicker you'll be able to pay off your loan. Let us understand with an example how OD is an effective tool to have:

Mr A got a home loan of Rs 40 lakh for a 20-year tenure at an interest rate of 8%. Based on calculations, he is required to pay a monthly EMI of Rs 33,458.

Now, let's assume that Mr A has an additional Rs 4 lakh and decides to make a partial payment after completing 24 regular EMIs to reduce his overall loan amount. If Mr A deposits Rs 4 lakh into the account linked to his home loan, the EMI will decrease to Rs 29,958 starting from the next month.

This reduction occurs because the interest is calculated based on the outstanding principal amount. Therefore, the more funds you deposit into your account, the lower your interest payments will be.

How to withdraw funds from a home loan OD facility?

Your home loan overdraft account is connected to your savings or current account, allowing you to transfer funds via mobile banking. Some lenders offer exclusive chequebooks and debit cards for overdraft accounts.

What are the benefits of a housing loan overdraft facility?

• Prepayment flexibility: You can prepay the loan anytime without facing prepayment fees.
• Interest cost reduction: Deposit surplus funds into the loan account to reduce interest expenses. You can lower the overall interest payable by reducing the outstanding loan balance.
• Withdrawal flexibility: Gain flexibility in withdrawing money from the loan account. Access funds for various needs such as emergencies, home expenses, or other financial requirements.
• Avoid prepayment penalties: With an overdraft home loan, you can avoid any prepayment penalties. This method offers a solution to avoid the steep costs associated with such penalties while allowing you to use OD facilities as required.
• Ability to repay the loan early: An OD facility offers the feature to repay your home loan before the agreed-upon tenure. This feature can prove beneficial if you intend to pay off the loan within a shorter time frame.

What are the limitations of a home loan overdraft?

• Not for those struggling financially: Overdraft home loans pose risks for individuals needing to save money or facing financial instability. They may struggle to repay the entire amount in one lump sum, potentially leading to financial strain.
• High interest rates: Despite offering flexibility, overdraft home loans usually have higher interest rates than standard home loans. This means you need to repay the loan quickly to reduce interest costs.
• Opportunity cost: Using the overdraft facility may result in losing interest income, as surplus funds are redirected from potential investments to loan repayment. This can be financially unwise, especially if the potential earnings from investments exceed the Home Loan Interest Rates.
• No tax benefits: Borrowers do not receive tax benefits under section 80C on additional home loan payments, reducing the financial incentives associated with the facility.

Also Read: Top 6 factors for selecting the right Home Loan

Summing up

A home loan overdraft facility addresses your immediate financial requirements and offers the flexibility to deposit and withdraw funds from the loan account at your convenience.

You should opt for a home loan with an OD facility only if surplus funds are available for prepayment. Otherwise, the associated interest rate could escalate the overall borrowing costs.

Go ahead with this facility after doing a thorough cost-benefit analysis and choose the option that provides you with the best use of your money.

Apply for a Home Loan today with Axis Bank.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.