What is the home loan overdraft facility and who should take it?

Before opting for home loan overdraft facility, borrowers should weigh the actual pros and cons and then proceed with it.

It’s almost impossible to ignore the difficulties that aspiring homeowners face. With multiple challenges on the housing ladder, paying off a home loan is a serious commitment that can span 20 or even 30 years. The other challenge for borrowers is high EMIs if chosen for a shorter term.

New-age financial institutions understand this financial and psychological burden that a consumer goes through. To reduce the burden, banks continue to offer new facilities. One of them is an overdraft facility on a home loan.

Mortgage overdraft is a type of loan that allows borrowers to borrow money against their home equity, also known as short-term credit. This facility can be useful if you need to make an emergency purchase and you don’t have cash on hand. But it can also be expensive. It is therefore important to know how much an overdraft will cost before using one. Let’s read below to know the pros and cons of the same and who should go for it.

Refund flexibility: This facility is for borrowers who prefer to increase their EMI whenever their income increases. The extra money you put in your account reduces your total outstanding principal and debit interest. This way to speed up home loan repayments is a great way to clear your long-term debt faster. Plus, with an overdraft on a home loan, you can avoid the high cost of prepaid penalties while still being able to use your account as needed.

Ease of withdrawal of surplus: Compared to normal home loans, overdrawn home loan accounts help borrowers conserve cash. So whenever you need funds, you can withdraw an excess from your account. This type of facility is helpful in meeting any financial emergency such as house expenses, weddings, other debts, etc., without opting for a personal loan. Home borrowers who think they are short on cash should take advantage of this facility as it provides much-needed flexibility without affecting your credit score.

Pay per use: The overdraft in a home loan works like an approved loan. As per the requirement, the money can be withdrawn and interest only has to be paid on the amount you use. This is because the interest rate on this facility is linked to the prime interest rate and if it goes down, you will benefit from it.

Conclusion

In a nutshell, the product is very powerful for borrowers who often have access to short-term surplus. As seen, earners who work on bonuses and businessmen with cyclical sales can deposit the extra money earned into their home loan account to reduce the total interest expense. If the facility is used in a planned manner, the borrower can repay the loan faster without incurring a prepayment penalty.

However, before opting for this facility, borrowers should weigh the actual pros and cons and then proceed with it. Indeed, it is important to be careful when analyzing how much you save on total expenses. For example, the interest on this facility is 20 to 60 basis points higher than that of an ordinary home loan. So, when you go to this facility and do not deposit enough excess funds, you may end up paying a higher amount. Therefore, home loan overdraft makes sense for those with a large surplus on hand.

Also, most take it easy with the idea that they will earn interest on the amount they deposit. But, it is important to note that this facility only helps in reducing the total interest expense and not earning from it. Therefore, before settling down, read the terms and conditions carefully to make an informed choice and enjoy maximum benefits.

(By Atul Monga, Co-Founder and CEO, BASIC Home Loan)

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