A Home Loan overdraft facility allows the borrower to deposit any additional lump sum amount over and above the monthly EMIs into the loan account. This amount can remain in the account, and the borrower may withdraw funds as required. A Savings or Current Account is generally linked to the loan account for such deposits. The overdraft limit against the property and the applicable terms and conditions may vary between lenders.
Understanding Home Loan Overdraft Facility
A Home Loan overdraft facility links your Home Loan to a flexible account. Interest is calculated on the net outstanding amount after adjusting surplus deposits.
Key Features and benefits
- Flexible withdrawals
- Interest savings on surplus amounts
- Linked overdraft account structure
- Reduces total interest burden
- Offers liquidity for emergencies
- Supports better financial management
1. What is a Home Loan with an Overdraft Limit?
The Overdraft facility on a housing loan allows the borrower to deposit any additional lump sum amount over and above the monthly EMIs, to their loan account.
The additional amount can remain in the loan account, and the borrower also gets the option to withdraw funds from the account, as and when required. A Savings Account or a Current Account is generally linked to the loan account, for such additional deposits. The OD limit against property and the Terms and Conditions can vary between lenders.
What are the Benefits of an OD Limit?
Here are some of the top advantages of the OD facility -
- The additional funds work as a prepayment against the housing loan, to help the borrower repay the loan earlier than the actual loan tenure
- The flexibility to withdraw and use the OD amount, offers liquidity, lacking in methods like foreclosure and partial prepayment
- Prepaying or foreclosing a fixed-rate housing loan attracts a penalty, but the Overdraft facility does not involve any penalty.
What are the other important things about Housing Loans with an OD facility?
Under Section 80C (IT Act), Home Loan borrowers can claim a deduction of up to Rs lakh on the principal component of their housing loan EMIs. But as OD deposits are not considered principal repayment or prepayment, the deposits are not eligible for this tax benefit.
Also, as compared to a non-OD Home Loan, loans with an OD facility are offered at a slightly higher interest rate.
Can Existing Borrowers Use the OD Facility?
Yes, even if you are already repaying a regular Home Loan, you can talk to your loan provider to access this facility. But note that every lender in the country does not offer housing loans with OD limits. There can also be charges involved, for accessing the Overdraft facility.
If your current loan provider does not offer housing loans with an OD limit, you can switch to another lender once you meet their home loan eligibility criteria. However, go for it only if it provides considerable savings.
Who should consider a Housing Loan with an OD Facility?
It is generally recommended that borrowers consider a housing loan with an OD facility, only if they can generate a surplus amount on a regular basis, that can be deposited into the overdraft loan account.
If the surplus contributions are not significant or regular, the higher interest rate will not provide a lot of savings. Borrowers are advised to consult their loan provider, to know more about the OD facility and how it works.
Saving Interest on a Housing Loan with an Overdraft Limit
A Home Loan with an overdraft limit, can be an excellent way to save a significant amount of money on interest payments against the loan amount. But consider this\an option, only when you have a regular source of additional income.
If you are about to apply for a housing loan, consult your lender, know more about this facility, and whether or not it is the right fit for you.