Want to take a home loan overdraft facility? Here are its pros and cons

A home loan is a significant financial commitment that can endure for numerous years. As the Indian real estate industry continues to expand, homeowners are consistently searching for creative ways to finance their housing requirements. One method to utilise your extra funds for loan repayment is through a home loan overdraft facility. A home loan overdraft facility functions much like a checking account with an overdraft feature, but it’s connected to your home loan. 

Also Read: Income tax: Home loan benefits when two houses are self-occupied

The lender establishes an overdraft limit, usually matching your home loan balance. You are provided with a linked savings or current account to oversee the overdraft. You also have the option to deposit additional funds into this account, which will be used to prepay your home loan and lessen your interest payments. The primary advantage is the ability to access funds from the overdraft limit, up to a specified amount, when required.

Advantages and disadvantages you must know

Using the home loan overdraft facility functions as a two-way avenue: By placing any additional funds in the linked account, you can decrease your home loan principal and cut down on interest. Additionally, you can utilise the untapped portion of your home loan limit for unexpected or planned expenditures. Interest is applied solely to the amount withdrawn. If you’re contemplating a home loan overdraft facility, here are several advantages to consider:

Flexibility: Similar to a line of credit linked to your home loan, you can access funds whenever you need them , up to a certain limit, and you’ll only be charged interest on the amount you use. This can be beneficial when unforeseen expenses arise.

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Potential interest savings: Unlike conventional fixed-rate home loans, which may charge a fee for prepayment, a home loan overdraft enables you to deposit additional funds into the linked account, thereby reducing the overall principal of your home loan. This leads to reduced interest payments in the long run.

Quicker repayment: Additional funds placed in the overdraft can be utilised to make substantial payments towards the principal, reducing your loan duration and further cutting down on interest costs.

Convenience: Handling your home loan and overdraft facility via a linked account streamlines your finances. Additionally, in certain instances, the interest paid on funds withdrawn from the overdraft may be tax-deductible.

Also Read: 5 Strategies to Better Manage Your Home Loan EMIs

While a home loan overdraft facility provides flexibility and the possibility of savings, there are certain drawbacks to take into account:

Elevated interest rates: The primary downside is the interest rate. Although you can reduce interest by making prepayments through deposits, withdrawals from the overdraft usually attract a higher interest rate than your standard home loan rate. This can offset some of the savings if you frequently utilize the overdraft.

Risk of overspending: The ease of accessing available funds can be enticing, particularly for unforeseen expenses. This may result in overspending, ultimately prolonging your loan duration and elevating the overall interest paid.

Loss of interest income: Any additional funds placed in the overdraft account usually do not accrue interest. This could be a drawback if you have alternative investment opportunities that offer higher returns.

Also Read: Income tax benefits on second home loan — Explained

Not suited to everyone: If you find it challenging to manage your finances, an overdraft facility may not be advisable. Convenient access to additional funds can lead to a cycle of debt.

Not all lenders provide home loan overdraft facilities. It’s crucial to inquire with your lender about their particular loan offerings. A home loan overdraft facility can be advantageous for financially savvy individuals with disposable income. It provides flexibility and the chance to minimise interest costs. Nonetheless, if you face challenges in handling credit or lack additional funds to deposit, opting for a conventional home loan may be more suitable.

Atul Monga, CEO and Co-Founder, Basic Home loan

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Published: 10 May 2024, 01:45 PM IST