An overdraft facility on a housing loan lets the borrowers deposit funds over and above the monthly instalments of loan repayment to their accounts and allows them to withdraw money from the accounts whenever needed.
The lender opens an account in your name with an overdraft limit that is often equal to the balance of the outstanding house loan. You may repay the loan by transferring money to your account.
Any additional deposits you make over and above the predetermined monthly EMI are considered prepayments. The extra money will instantly reduce the loan's principal and interest balance.
This account allows for up to a specific amount of withdrawals that must be repaid with interest.
How does this facility work?
Your lender will link your home loan account with your designated current or savings bank account when you apply for a home loan overdraft facility. You are free to make any additional deposits into this account as you see fit.
After subtracting the EMI payment, the additional sum deposited by you is regarded as a prepayment for your mortgage. The amount of outstanding principal is used to determine how much interest must be paid. Additionally, you have the choice to withdraw this additional cash when necessary.
As a result, this facility reduces the overall loan obligation, with interest only being paid on the outstanding loan balance. The ability to withdraw the additional cash as and when you need is what makes this facility special. The amount you withdraw is added back to the effective principal amount, which served as the basis for calculating interest.
The lender may utilise the withdrawn funds any way they see fit, and the facility may be used even after the loan has been repaid. You should be aware that the amount of money you may withdraw using this feature is limited.
Some lenders may cap the amount at 25 percent of the total loan amount, however, it may vary from one bank to another.
What are the benefits of a home loan overdraft facility?
Overdrafts are extremely liquid. You are permitted to withdraw money from your account up to a certain limit, and the bank will let you do so as often as is convenient for you. Having this flexibility is advantageous in times of financial difficulties.
This option is available to borrowers who desire to raise their EMIs in response to increases in their income. Your total outstanding principal and interest will decrease as a result of the additional funds you deposit into your account. This method of accelerating home loan payments is a terrific approach to pay off long-term debt quickly.
The penalty for prepaid sums can be avoided with an overdraft home loan.
Are there any drawbacks?
The biggest drawback of overdraft loans is that they don't help those who need to save money. Those who are unable to maintain their existing financial situation have a higher chance of defaulting on this sort of loan.
If they do not have enough cash on hand, it may be challenging for them to repay the full amount in one go. This indicates that it will be costly in the long term if you utilise the overdraft option for your usual costs.
Due to their ability to be used as needed, overdraft home loans frequently tempt consumers to sign up for them. The cost of this gain, however, might occasionally be far higher. The interest rates on these loans are comparatively high. They are typically more expensive than a conventional home loan.
In the end, a house loan overdraft option has pros and cons of its own. It is crucial to properly weigh the costs and benefits before deciding to go for one. The research will enable you to decide whether a standard home loan or one with an overdraft capacity is better for you.