How Are Home Loan Overdrafts Different from Regular Home Loans?

You have a choice between regular Home Loan and a Home Loan with an overdraft facility. If you understand the difference, you will be able to make an informed decision when you Apply for a Home Loan.

Repaying a Home Loan

Under normal circumstances, you have to make equated monthly instalments (EMIs) during the tenure of your Home Loan. However, if you get a windfall, you can prepay a part of your Home Loan. The prepayment is over and above the EMIs that you make each month. When you do this, it reduces the total interest that you will pay over the life of the Home Loan.

However, if you have a financial crunch and require money, you will not be able to dip into the surplus amount that you pay as prepayment of your Home Loan. Once you transfer the prepayment amount, the bank or lending institution does not reverse the transaction or make the amount available for you in an emergency. It is in a situation like this that a Home Loan with an overdraft facility can become your best friend!

Home Loan with Overdraft Facility

Unlike a traditional Home Loan, a loan with an overdraft facility allows you to reduce your loan burden by prepaying the loan as and when you have surplus money. What makes this Home Loan unique is that you can use the surplus amount if you need cash urgently.

When you Apply for a Home Loan with an overdraft facility, the bank will open an overdraft account for you. The account will be linked to your Home Loan account and will function like any other bank account. You can deposit and withdraw cash as and when you like.

The money that you park in the overdraft account does not attract interest. The bank considers the money as repayment of the principal and uses it as a basis to calculate the interest rate on your Home Loan. Hence, any money that you add to the overdraft helps to reduce the outstanding loan amount, thereby lowering the interest as long as the amount stays in the account.

When you withdraw the amount, the principal goes back to what it was and so also the interest that you have to pay. Hence, to reduce the interest, you need to maintain a balance in the overdraft account, but you are free to use this money as and when a need arises.

Comparing Home Loan Overdrafts and Regular Home Loans

Interest Rate:

A Home Loan with overdraft facility has a higher rate of interest compared to a conventional Home Loan. The difference in the interest rate will depend on the bank or lending institution, and you should compare the interest rate of the two Home Loans before opting for one.

Tax Benefits:

If you prepay a regular Home Loan, the prepayment amount is considered as payment of the principal amount. Hence, you will enjoy tax deductions under Section 80C of the Income Tax Act. However, the amount that you place in the overdraft account does not qualify for tax deductions. You can avail tax deductions just for the EMIs that you pay.

Other Things to Consider

When you opt for a Home Loan with an overdraft facility, it is prudent to remember that you should maintain a reasonably high balance in the overdraft account to enjoy significant benefits. The balance should be able to offset the high-interest rate that you may be paying on your Home Loan.

If you have a lot of inflow and outflow of cash on a monthly basis, it may make sense to opt for a Home Loan with an overdraft facility. You can use the overdraft account for your transactions and save money on the interest.

If you are wondering which Home Loan to opt for, consult the financial experts at MyMoneyMantra. Our experts will help you understand the pros and cons of the Home Loan with an overdraft facility. We will also help you make an informed decision based on your financial health and goals.