Should you opt for home loan overdraft facility?
The borrower should do a cost-benefit analysis to find out whether the benefit of interest-saving through the home loan overdraft account is more than the higher cost of the loan.
One way out is to opt for home loan overdraft facility with your home loan account. With this home loan overdraft facility, not only will your interest payments and loan tenure reduce, you can also withdraw surplus amounts deposited in your home loan account, from your bank anytime you need it.
However, there is a catch. The lender normally charges a slightly higher interest rate on a home loan with an overdraft facility as compared to a conventional home loan. Therefore, before opting for such a facility, the home loan borrower should do a cost-benefit analysis to find out whether the benefit of interest-saving through the home loan overdraft account is more than the higher cost of the loan.
What happens after opting for home loan overdraft facility?
The home loan account, which has an overdraft facility, is linked to your bank current or savings account. In such a scenario, any amount deposited in the home loan account over and above the EMI (equated monthly installment) amount is used as a pre-payment towards the home loan, thus reducing the interest on the outstanding loan amount. But if you need this extra deposited amount back, you can simply withdraw it and your loan outstanding amount will increase/get rebalanced accordingly. This means that making withdrawals from your home loan account will lead to a rise in the home loan outstanding balance, thereby increasing your loan interest payments on the outstanding loan amount.
Amit Prakash, Principal Partner, Square Capital, a Gurugram-based online lending broker said, "Home loan overdraft facility is almost identical to a current account with an overdraft limit, where you can deposit any extra money into your home loan account and this extra money will be treated as prepayment against the principal amount as long as the money remains there."
How home loan overdraft facility works
Interest payable on your home loan is calculated on the outstanding principal amount of the loan. Once the borrower opts for the home loan overdraft facility, he/she gets a flexible repayment option in which the borrower is free to deposit surplus funds into savings/current account (this is linked with the home loan account) during the loan tenure, which will be deducted immediately from the outstanding principal balance to calculate interest. Similarly, the borrower can withdraw any additional amount within the limit, which is the surplus amount he/she has deposited over and above the EMI, as and when required.
Gaurav Gupta, Co-Founder & CEO, Myloancare.in said, "The deposit and withdrawal cycle can be repeated any number of times during the loan tenure, thus giving you the flexibility to manage your cash flow and minimise your interest outgo."
Gupta explains, suppose Mr A took a home loan of Rs 20 lakh for 15 years with a home loan overdraft facility in June 2018, at an interest rate of 9.80 percent. The EMI for Mr A is Rs 21,248. Now in December, Mr A deposits Rs 30,000 surplus amount along with the regular EMI. So, in January although the EMI would still be Rs 21,248, the composition of this instalment would change with higher amount being allocated towards principal repayment and less towards interest charged for that month as the interest component would fall.
So, in this case, if Rs 30,000 had not been deposited in the current account, then the interest and principal breakup for the January 2019 EMI would have been Rs 16,045, and Rs 5,203, respectively.
However, under the home loan overdraft facility, Mr A deposited Rs 30,000 in December. Consequently, the interest and the principal amount comprising the EMI of Rs 21,248 for January 2019 changed to Rs 15,800, and Rs 5,448, respectively.
Comparison of interest rate between conventional home loan and home loan with overdraft facility
|Banks||Conventional home loan interest rates (percentage p.a)*||Home loan with OD interest rates (percentage p.a)*||Processing fees|
|State Bank of India||8.55-9.25||8.6 - 9.75||0.35 percent of the loan amount; Minimum of Rs 2,000/; Maximum of Rs 10,000/ (plus taxes)|
|Axis Bank||8.9-9.15||9.2 - 9.35||Up to 1 percent of the loan amount subject to a minimum of Rs 10,000/|
|Bank of Baroda||8.7-9.7||8.7 - 9.95||0.25 to 0.5 percent of the loan amount; minimum of Rs 7500; maximum of Rs 20000|
|Punjab National Bank||8.65-8.75||8.8 - 9.85||0.35 percent of the loan amount; minimum of Rs 2,500 and maximum of Rs 15,000|
|Bank of India||8.8-9.7||8.8- 9.7||0.25 percent of loan amount; minimum Rs 1,000 and maximum Rs 20,000.|
|IDBI Bank||8.75-9.15||9.35||Up to Rs 5,000 + applicable taxes|
Advantage of home loan overdraft facility
The home loan overdraft facility benefits those borrowers who have fluctuating income and cash flows such as self-employed businessmen with cyclical sales or salaried people expecting to earn high bonuses. Gupta said that the borrower has the flexibility of depositing surplus money regularly into the account which results in lower interest cost, option to prepay the loan at a faster pace without incurring any prepayment penalty. "Along with all this, you can retain the flexibility of withdrawing amount from the account, which is equal to less than the surplus amount you have deposited over and above the EMI, at a later date which is not available in a standard home loan facility," he said.
Secondly, borrowers opting for home loan overdraft facility are less likely to transfer their loan to another bank offering a lower MCLR (marginal cost of funds-based lending rate). "Borrowers who are not comfortable changing the lender during the loan tenure to get a lower MCLR should opt for home loan overdraft facility as they can use this home loan account as a transaction account which can help them in reducing their interest payment outgo from time to time," says Gupta.
Disadvantages of home loan overdraft facility
1. Home loans with overdraft facility come at a higher interest rate compared to conventional home loans which make them a costlier option to begin with. "When you opt for a home loan overdraft facility, the interest rate on the loan is higher than that on a conventional home loan by an average 20 basis points, thus making the home loan overdraft facility more expensive than a conventional home loan," said Shetty.
2. When opting for a home loan overdraft facility, you are giving up on your savings by deploying your money towards early repayment. This may not be financially wise if you have the potential to earn a higher return on your savings.
3. Gupta said, "You don't get tax deduction benefit under section 80C on additional home loan principal repayment as the surplus amount deposited into the home loan account with home loan overdraft facility is not counted as principal repayment."
Points to note
You should opt for a home loan overdraft facility only if you often have high amounts of surplus funds available with you. Else, in the long run, it might translate into a higher cost home loan compared to a conventional home loan.
Prakash said, "Money deposited in a home loan overdraft accounts do not pay you interest so there is no direct earning from there. However, the surplus you park in that account brings down the interest payout of your home loan, reducing your EMI as a result. Interest saved is interest earned. So, if you look at it this way, there is an indirect gain in terms of money saved."