Home loans are a great way of fulfilling the dream of buying your own home. However, these loans usually come with long tenures and have a considerable rate of interest which the borrower is liable to pay. This long term commitment with the bank can be burdensome for many. To ease their loan burden, people prefer paying some amount as prepayments. But few banks constraint the borrower with their rules pertaining to a number of prepayments or by setting a limit on the amount which can be paid as prepayment. Also, when the borrower makes a pre-payment, that particular amount completely gets deducted from their account. This can be a little stressful sometimes as you go out of cash in hand which could have been used to meet any other financial emergency. To overcome this stress, banks offer home loan overdraft facility to its customers.
Home loan overdraft scheme offered by the banks links your home loan account and your current/saving accounts. Under this scheme, the borrower can deposit any surplus amount at their discretion into their home loan account similar to how they do in their savings accounts. The extra amount which will be left post the deduction of the monthly EMI will be considered as the prepayment towards the home loan. The interest will be calculated by deducting this surplus amount from the principal amount.
Home loan overdraft facility is flexible and allows you to withdraw the surplus amount if need be. When these funds are withdrawn, the withdrawn amount is added to the initial principal for the purpose of calculating the interest. EMI amount remains the same. Another advantage of the home loan overdraft is that the interest is calculated on a daily basis on the outstanding principal amount daily and the total interest will be debited at the month’s end. This means that any extra amount deposited and deducted thereafter from the principal amount will be free of interest immediately.
The home loan overdraft benefits are best availed by those having multiple sources of income or by business owners who have ample surplus funds regularly. Fintechs like LoansJagat provide an excellent platform wherein you can learn about this facility offered by different lenders under one roof.
Read More: How to Own a House of Your Dreams?
The several benefits of home loan overdraft are:
- Faster repayment of the loan
The loan gets paid quicker as the surplus money deposited minimises the outbound interest keeping the EMI constant and thereby making an adjustment against the principal amount.
- High liquidity
Home loan overdraft is like keeping your money in your savings account. You can use the money as and when required without disturbing your home loan accountings.
- Reduces interest liability
One may not get any interest on the surplus money kept in home loan overdraft account, but it reduces the interest liability as the principal amount of the home loan gets reduced.
- No penalty on prepayment
Usually, lenders charge borrowers with prepayment charges. However, this is not the case with home loan overdraft facility and no penalties are applied on the borrower.
- Option to withdraw the surplus money
One can withdraw the surplus money deposited in the home loan overdraft account if any financial emergency strikes and you need immediate cash in hand.
- Tax Savvy returns
Unlike fixed deposits which are taxable, the surplus money deposited in home loan overdraft does not uphold any tax implications as no interest is being credited on the surplus amount in your account.
Home loan overdraft is better than regular home loans prepayments and comes with various benefits. It is advisable to read out the terms and conditions of the facility provided by the chosen lender before you decide to go for it.