Repaying a home loan is tough on the pocket, and at times, you might even miss paying your instalments on time. The late payments, besides impacting your credit score, will also involve additional charges.
One way to avoid this is to prepay your home loan with an overdraft facility. This is essentially a credit option that is linked to your existing bank account. It allows the borrower to deposit any additional lump sum amount over and above the equated monthly instalments (EMIs), into his/her loan account.
“Your lender will provide you with an overdraft limit which is equivalent to the amount owed on your home loan,” says V. Swaminathan, executive chairman, Andromeda Loans.
This is how it works. Typically, a new savings account or a current account would be linked to the loan account, in which you can make additional deposits. This overdraft amount will get directly deposited into your home loan account. This set-up will reduce your principal amount and interest, while your EMI would remain the same.
The additional amount will remain in the loan account, and the borrower will also get the option to withdraw funds from the account, as and when required.
So, should you take an overdraft facility? Here are the pros and cons of the same.
Benefits Of Home Loan Overdraft: Through a home loan overdraft, you can reduce your principal amount as well as the interest. You can also use your overdraft account to withdraw and deposit funds. Also, you can prepay your home loan using this facility.
“The tenure of your home loan reduces,” says Swaminathan.
Besides, you can also increase the EMI when your income rises. That way, you can repay your home loan faster.
There are other benefits too.
“This will be an excellent tool for parking surplus funds until you get a suitable opportunity to invest in the variable markets,” says Chenthil Iyer, founder and chief strategist, Horus Financial Consultants.
He adds that with a home loan overdraft, a long-term on-demand loan at a relatively low-interest rate would be available until the original term is completed if one uses this facility instead of paying it off.
“It will not lead to situations where people emotionally decide to pay off the low-interest home loan only to realise later that they have deprived themselves of the much-needed liquidity that is required for various life goals. They in turn have to take a personal loan or other loans at a higher interest rate.
Demerits Of Home Loan Overdraft: A home loan overdraft has a slightly higher rate of interest than a regular loan. Also, some private banks have a lot of restrictions on how much can be kept as a balance in this account at any point. Nationalised banks typically offer a straightforward product.
Besides, you will lose out on tax benefits too.
Adds Swaminathan: “The interest rate on a home loan overdraft facility is slightly more than a traditional home loan. So, you should opt for this credit facility if you can afford to enjoy liquidity at a higher interest rate. Also, if you plan to deposit money in this account, it is advisable to do the same after investing in tax-saving instruments. This is because any surplus amount deposited in this overdraft account will not yield any tax rebate.”