Eligibility, Benefits and Drawbacks of overdrafts on home loans

Introduction 

A home loan is a huge step in an Individual's life and a commitment which lasts for years. 

Banks are aware of the mental and monetary obstacles associated with obtaining a home loan. Banks offer a variety of services to reduce such strains on borrowers. One such service is the overdraft home loan, which stands out as a highly beneficial option, particularly for those aiming to complete their mortgage sooner. Although an overdraft facility is an excellent method for repaying a home loan, it may not be the right fit for everyone. You can easily review and apply for a simple loan. Keep reading to learn all about the overdraft home loan service. 

 

What is a Home Loan with an Overdraft Limit? 

The Overdraft facility on a housing loan is like an overdraft facility of your current or savings bank account. It allows the borrower to deposit any additional amount over and above the monthly EMIs (Estimated Monthly Installment), to their loan account.  

This extra amount is deposited in the home loan account, and the borrower can withdraw funds from the account as and when required. A Savings Account or a Current Account is often linked to the loan account for such additional deposits. Every Housing Finance company has its own overdraft limits and terms and conditions. 

The interest of home loan is charged only on the outstanding amount in the account. If you have deposited an advance in the account, it is treated as a prepayment and interest is charged only on outstanding amount.Additionally, the home loan borrower can also withdraw funds from this account in case of any emergency or when a huge expenditure awaits them.  

An interest charge is only applied to the portion of the loan that exceeds the account balance during the period the loan was borrowed. Lenders impose a limit on such overdrafts to be safe from risk. This limit is usually around 25% of the loan amount, though it may vary based on the bank's own policies. 

 

Overdraft Facility for Home Loans: How it Works 

One can start using the bank overdraft facility after the bank approves it. 

Suppose Mr. A has a home loan of 20,00,000 Rs. His monthly EMI is 25000. During Diwali Bonus, he gained extra income and now instead of 25,000, he decides to pay 35000 as his EMI. The interest on his loan would be now charged in the outstanding amount minus the extra 10,000 he paid. 

Mr. A can also withdraw the money when he requires it to a certain limit. This limit is specified by the bank. 

 

What are the Benefits of an OD Limit? 

Following are the benefits of bank overdraft facility: 

• Regular Payments: The OD facility leads to regular payment of installments to the bank. It works even when there is no sufficient balance in the account and reduce penalties or customer 

• Less Documentation: Since OD facility is pre-structured, the documentation required is reduced. Such Facility makes transactions easier in long term loans. 

• Flexibility: OD facilities are flexible. It can be used anytime and anywhere. There is no restricted time duration for the old facility as well. 

 

Drawbacks of Bank Overdraft Facility 

• High Interest rates: Interest rates are higher on loans with such a facility. 

• Bank Limitations: The bank can change or modify the limit or request that money be returned sooner than intended. 

• Short Duration: The duration of such loans is shorter than other long-term loans. The overdraft loan must be paid within a specific period. 

 

Can Existing Borrowers Use the OD Facility? 

Yes, you can discuss with your existing bank and request for the OD facility. However, it is not compulsory for banks to provide you with an overdraft facility and hence it depends on one bank on another. You may have to pay an additional sum to your bank as a processing fee for the same. 

If your Bank does not provide OD facility, you can find other banks who provide this facility. Check their home loan eligibility and apply for the same. 

 

Housing Loans with OD Facilities: Who should consider them?

It is recommended that borrowers should take overdraft facilities only when that are sure that they can generate surplus income regularly. Such loans have high interest rates, and you will be only increasing your liability if you cannot generate surplus income regularly. 

 

Conclusion 

A Home Loan with an overdraft limit is an exceptional method to save a significant amount of money on interest payments against the loan amount. But this is an excellent method only if you regularly generate surplus income. 

Talk to a home loan consultant and You Bank for the same and make wise decisions.