Is home loan overdraft good for you?

Adhil ShettyBankBazaar

Every home loan borrower looks forward to pay off his debt before the actual tenure ends. Part pre-payment facility certainly helps retire your liability earlier, but there are some limitations. Some banks put a cap on the maximum pre-payments possible in a year, while some others have conditions on minimum amount for part pre-payment. Moreover, what if you made a pre-payment this month and are facing a financial emergency next month? Well, you would go for a personal loan or some other loans. A home loan overdraft is an innovative product providing a solution for these specific situations.How does it work?In a home loan with an overdraft facility, the bank links a dedicated current or saving account with your home loan account. The borrower can park any extra funds in this account whenever he wants, just like he puts money in a savings account. Any additional money, over and above the EMI, parked in the account is treated as pre-payment towards the home loan. This effectively brings down the overall loan liability and the interest is charged only on the balance loan amount. What's more, you retain the option of withdrawing that sum of money you parked additionally as and when required.Home loan overdraft: An illustrationRanjeet took a home loan of Rs. 30 Lakhs for a tenure of 20 years at an interest rate 10.1%. He would be paying a monthly EMI of Rs.29,150. If we take the first 24 months as an instance, around Rs. 24,800 goes towards interest payment while only about Rs.4000 is towards principal repayment. Let us assume that Ranjeet has a surplus of Rs. 2 Lakhs and he makes a partial prepayment after 24 regular EMIs, so that his outstanding amount gets reduced to Rs.27,21,145.In an ordinary home loan, the EMI however remains same, but the tenure gets reduced from 240 to 209 months. He can request for revising the EMI, but the principal-interest ratio is unchanged.In home loan overdraft, if he pays the sum of Rs. 2 lakhs in the account linked with the loan, the EMI comes down to Rs.27,382 from the next month. The interest component thereby varies as per the book balance (principle outstanding) and the interest is calculated on this on a daily basis.Regular Home Loan versus Home loan Over Draft

Who should you opt for itHome loan overdraft is good for double income families that have surplus amount or businessmen who get regular surplus funds. For businessmen, the added advantage is that whenever they are in need of some funds, they can withdraw the surplus amount from loan overdraft account. This helps in meeting financial emergencies without going for a personal loan. And again, you have the same flexibility of repayment, when you get funds.Who should not to opt for itIf you are just comfortable with managing your regular EMIs, and do not have a chance to generate regular surplus amount, more than once in a year, a normal home loan is sufficient. This is because, home loan overdrafts are on an average 25 basis points more expensive than regular home loan. So before proceeding, you must ascertain whether your budget allows you to take maximum benefit of the overdraft facility in the long run.The surplus amount deposited here does not qualify for Section 80C rebate, as it is not treated as pre-payment. So it is advised to park only the amount over and above the tax deductible interest portion. Interest saved (as shown under available balance) is not deductible under Section 24, and is shown as available balance.Bottom lineHome loan overdraft is a great option for people having regular surplus money. Used judiciously and in a planned manner, it can significantly reduce your total interest outgo. All banks do not offer home loan overdraft facility. The ones currently offering this scheme include State Bank of India, PNB, Standard Chartered Bank, HSBC and Central Bank of India.