Home Loan with Overdraft Facility: Process & Benefits

Repayment of a home loan is a long-term responsibility where the borrower needs to pay all his EMIs timely and for years, as per the tenure. It imposes a financial burden on the borrower and may sometimes leave him/her with no spare cash for emergencies or other expenses.Also, failing to pay the EMIs timely may attract penalty charges, increasing the burden further. To ease this burden, many banks and other financial institutes are now offering home loans with an overdraft facility.

With a home loan overdraft facility , you can:

• Deposit additional funds(above the due EMI) in your home loan account, whenever surplus cash is available. This additional deposit is treated as a prepayment of the principal amount (without any penalty charges).
• Withdraw funds for your financial emergencies, as per the overdraft limit of your home loan account. This withdrawn money must be repaid by the borrower in due time, along with applicable interest.

• Reduction of Overall Loan Cost: Any additional deposit made by the borrower to their home loan account is deducted from the outstanding loan, hence lowering the interest too. By paying lesser interest, the overall loan cost is also reduced.
• Greater Liquidity: Apart from the flexibility to deposit additional funds, it also allows you to withdraw money from your home loan account. Hence, the availability of liquid funds is another added advantage that makes the overdraft facility a great deal for borrowers.

1. Connecting Your Home Loan Account With Savings/Current Account: Whenever you take a loan, a loan account is opened where the borrower can deposit the EMIs. For the overdraft facility, this account is linked with your savings/current account to allow the free flow of money between these accounts.
2. Additional Deposits to Home Loan Account: You can easily transfer money from your savings/current account to the home loan account whenever you have surplus money and wish to prepay your loan. Hence the outstanding dues are lowered, reducing the future EMIs also.
3. Withdrawals From Home Loan Account: You can withdraw money from your home loan account to address any financial needs with the same ease as you make the additional deposits. The money can be withdrawn up to the limit permitted by your bank/financial institutions. Any amount withdrawn adds up to your principal amount and needs to be repaid along with the interest.

Whenever you need money from your home loan account, it can be quickly transferred to your connected savings/current account. You can also make multiple withdrawals through checkbooks/Debit cards provided by the lenders. It is similar to a bank loan that is added to the already existing home loan and the interest rate/tenure is adjusted accordingly. This leads to an increase in your home loan outstanding balance post withdrawals.

Few things must be remembered before you choose to open a home loan account with an overdraft facility.

• In comparison to regular home loan plans available in the market, a plan with an overdraft facility may charge you a slightly higher interest rate. Hence, an overdraft facility may be beneficial for you only if you have surplus funds available.
• The additional fund transfer to your home loan account is similar to the loan prepayment, but it is not considered for tax rebate under section 80c of the Income Tax Act. Hence, if you are expecting tax benefits, a home loan with an overdraft facility may not be a great choice.

A home loan with an overdraft facility is a great choice for borrowers with fluctuating income and erratic cash flows, such as business persons or self-employed people. Also, salaried persons expecting to get frequent bonuses or any person with surplus cash may opt for an overdraft facility while taking home loans.Keep in mind that the additional cash deposited in the home loan account will not generate any direct profit but can indirectly benefit you by lowering the overall outstanding loan amount. Hence don't consider it as an investment but a way to have better control over your due home loan amount.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.