If money parked in the account is in excess of the EMI amount, it is treated as pre-payment towards the loan. This effectively brings down the liability, and interest is charged only on the balance.
Home loan overdraft accounts are becoming increasingly popular as an investment option. With more home-buyers parking surplus funds in their home loan overdraft accounts, banks have put a hold on offering the financial product to new customers.
A home loan overdraft option allows borrowers to deposit extra funds or the advance on the loan in a dedicated savings account linked to their home loan account. If money parked in the account is in excess of the EMI amount, it is treated as pre-payment towards the loan. This effectively brings down the liability, and interest is charged only on the balance. Bankers are wary of overdraft accounts as no interest is charged on the excess money in them, thereby hurting their margins.
The interest outgo on the loan amount is proportionately slashed as against the quantum of the loan covered by the balance in the overdraft account. The overdraft option allows account holders to withdraw money whenever needed, but the interest rate on the home loan will consequently increase.
Lenders also face the double whammy of having to make provisions for outstanding loans while losing out on interest income.
With the financial market and the real estate sector on shaky ground, idle money in home loan overdraft accounts is piling up, adding to pressure on banks that are losing out on interest income while having to pay all attendant costs such as commission to agents and provision costs.
For example, if you have Rs 1 lakh in your savings account at four percent per annum, it would earn Rs 333.33 every month as interest. On the other hand, if you transfer this Rs 1,00,000 to your home loan overdraft account, it would earn Rs 833.33 per month, at 10 percent per annum. In practice, this money is not actualised as it is the amount you do not have to pay towards your loan, thereby contributing to your savings. Another advantage is that the interest income is not taxed.
Some popular offerings of Indian banks are SBI's MaxGain, IDBI's Home Loan Interest Saver, and Axis Bank's Super Saver Home Loan.
The emergence of overdraft accounts as a source of idle capital is adding to the stress on banks, already burdened by the weight of bad loans. While most banks are not completely shelving the product, they are adding additional clauses to such schemes to make it more restrictive and less of a liability.
Some banks have set the ceiling on the money in overdraft accounts at half the value of the loan, while others are offering such products only for smaller loan amounts. According to a Times of India report a multinational bank has taken to charging an annual fee on the balance amount in the overdraft account at the end of the loan's term.
Home loan overdraft accounts were initially offered only by multinational banks to woo affluent Indian customers. However, domestic private lenders such as Axis Bank and ICICI Bank soon joined the bandwagon, followed by state-run counterparts.Even as banks continue to sacrifice interest income for the sake of volumes by persisting with loan overdrafts, the sentiment among lenders is changing with the move to be bring in stricter criteria for the disbursal of home loans.