Home buyers are constantly looking for flexible loan options that can help them save on interest and manage funds effectively. One such innovative option is the Home Loan Overdraft Facility. This type of loan is different from regular home loans because it allows you to change your interest payments and take out money when you need it. If you're looking for a new home loan or want to make your current loan easier to manage, this option could work well for you.
A Home Loan Overdraft Facility is a loan structure where your home loan is linked to a current or savings account provided by the lender. This account allows you to deposit extra funds whenever you want, which reduces how much you owe on your loan and also reduce your your interest burden. What’s more, you can withdraw these funds in any time, giving you the flexibility to use this account as both a loan repayment tool and a liquidity source.
For example: Imagine you have a home loan of ₹30 lakhs linked to a savings account. If you deposit ₹2 lakhs into this account, your loan principal is effectively reduced to ₹28 lakhs for interest calculations. This means you pay interest only on ₹28 lakhs instead of the full ₹30 lakhs. If you need money later, you can withdraw from that account up to the amount you deposited, giving you flexibility while managing your loan.
Interest Savings: By depositing extra funds, you reduce the principal amount, which lowers the interest you pay.
Flexibility: You can withdraw money when needed, making it easier to manage unexpected expenses.
Liquidity: It allows you to keep your funds accessible while still benefiting from lower loan interest.
Loan Management: It helps you manage your home loan more effectively, combining repayment and savings in one account.
Financial Control: You have better control over your finances, as you can adjust your loan obligations based on your current situation.
To understand this facility, let’s break it down into simple steps:
Linked Overdraft Account: When you get a home loan with an overdraft option, your lender opens an overdraft account (similar to a current account) in your name.
Deposit Extra Funds: Any extra money you put into this account counts as repayment on your home loan.
Interest Calculation on Reduced Balance: The interest on your loan is calculated based on the loan amount minus the money in your overdraft account.
Flexibility to Withdraw: You can take out the money you deposited whenever you need it, unlike with regular loan repayments.
Interest Savings: Putting extra money into the account lowers the amount of interest you pay over time, helping you save money.
Interest Savings:
Every rupee you put in your overdraft account reduces how much you owe on your loan. The interest is only calculated on the remaining amount, which can save you a lot of money over time.
Liquidity and Flexibility:
If you ever need funds, you can simply withdraw from the overdraft account without having to go through a loan or withdrawal application process.
Tax Benefits:
Similar to a standard home loan, the overdraft facility also allows you to claim tax deductions on interest payments under Section 24(b) of the Income Tax Act (up to ₹2 lakhs for self-occupied properties).
Partial Prepayment Without Losing Liquidity:
You can deposit any extra money into your overdraft account to lower your interest. If you need it later for emergencies, you can still use that money.
No Prepayment Charges:
When you put money into your overdraft account, you won't have to pay any extra fees, unlike some loans where prepayment can cost you.
Imagine you have a home loan of ₹50 lakh at an 8% annual interest rate with a tenure of 20 years. Your monthly EMI would be around ₹41,822. Now, let’s assume you deposit ₹5 lakh into your overdraft account. Here’s how it impacts your loan:
Without Overdraft Facility:
Interest is calculated on the entire ₹50 lakh, meaning you’ll pay significant interest over 20 years.
With Overdraft Facility:
With ₹5 lakh in your overdraft account, your effective loan principal becomes ₹45 lakh.
The interest is calculated on this reduced principal, potentially saving you thousands in interest over the loan term.
| Feature | Home Loan Overdraft Facility | Traditional Home Loan |
|---|---|---|
| Linked to Current/Savings Account | Yes | No |
| Flexibility to Withdraw Funds | Yes | No |
| Interest Calculated on | Principal Minus Deposits in Overdraft Account | Fixed Principal |
| Tax Benefits | Yes, on interest paid under Section 24(b) | Yes, on interest paid under Section 24(b) |
| Extra Interest Savings | Possible with surplus deposits | No additional savings mechanism |
| Prepayment Charges | Usually none for deposits | Might have prepayment penalties |
The Home Loan Overdraft Facility is a great choice for people who want flexibility and savings with their home loan. It allows you to deposit and withdraw money while lowering the interest on your loan balance. This option works well for those who can regularly keep extra funds and are good at managing their money.
Salaried and self-employed individuals with good credit histories are eligible. Banks may have specific income and loan amount requirements for this facility.
The primary risk is spending the deposited amount. Since withdrawals increase the outstanding loan balance, discipline is key to making this facility work effectively.
Yes, some banks allow existing home loan borrowers to convert their loans into overdraft loans. However, additional processing fees may apply.
Yes, similar to a standard home loan, you can claim tax deductions on interest payments under Section 24(b).
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