The overdraft home loan facility is a type of credit given by the lender to the borrower to pay off the high loan EMIs quickly. Home loan EMIs are massive if you calculate those in years. So, to avoid constant stress, banks provide overdraft home loan facilities. The overdraft facility is one of the best home loan facilities banks provide to their customers. Usually, when a customer apply for home loan, and the EMI tenure remains between 20-30 years, they nearly pay double the principal amount. It leads the borrowers to choose the prepayment and overdraft facilities often. Therefore, choosing an overdraft facility is the smartest move to save interest. Even existing home loan customers can apply for an overdraft facility.
How Does Overdraft Home Loan Work?
When you apply for a home loan, your bank creates a profile connected to your savings/current account. So, when you apply for a home loan overdraft, the bank adds the received money to the home loan account. As a result, it reduces your outstanding interest rate and EMI mortgage payments. It depends on you because the more money you put in the home loan account, the faster you close your home loan. Reputed banks allow you to withdraw and add money to your home loan. However, any money you withdraw from your home loan, you'll have to repay it with interest. Whatever amount you withdraw from your home loan will appear as the principal amount. You can withdraw money from your home loan account until you exceed your withdrawal limit. Banks usually keep the withdrawal cap to 25% approximately, but it can vary based on every bank's policy.
A bank must provide multiple options to their costumes, but customers must understand which facility is beneficial and what's not. Here are the considerable pros & cons of an overdraft home loan.
What are the Pros & Cons of Overdraft Home Loans?
Pros
-
Reduced Interest Rate
As the name suggests, an overdraft facility lets customers deposit particular money in their home loan account when applying for a home loan. Your money from your savings/current account will be deducted and added to your home loan account. Adding funds to your home loan account will work as prepayment and will reduce your interest cost.
-
Flexibility to Withdrawal Money
As we discussed above, home loan overdrafts can deposit and withdraw funds which serves the borrowers to maintain funds liquidity. Indeed, the withdrawal funds feature has its limits determined by loan amount. However, these features could be compromised if borrowers choose the prepayment or foreclosure options.
-
Evade Prepayment Penalty
According to RBI guidelines, banks cannot take charge of foreclosure/prepayment fees on floating rate-involved home loans, but they do not apply to fixed-rate loans. There are several benefits to home loan for women, but regardless of the benefits, they also have to pay charges if they opt for prepayment/foreclosure.
In such situations, overdraft home loans don't charge any penalty. In addition, having overdraft funds in the home loan account work as a prepayment of the principal amount, thus, reducing an inclusive interest on the home loan.
Cons
-
Slightly Higher Rate of Interest
Home loan interest rates, including overdraft facilities, are comparatively higher than regular ones. Financial experts believe overdraft home loans are slightly expensive, but they are still better if the borrower has the required amount. There are also some additional features on an overdraft, but it's useless if you don't utilise them.
-
No Tax Benefits
One of the biggest drawbacks of overdraft home loans is that it does not fall under Section 80C of Income Tax. The simple reason is that it is not considered an actual prepayment. So if you intend to avail of tax benefits, you can search for more home facilities and choose them as preferred.
Wrapping Up
So now that you know how overdraft home loans work, you can consult your bank and choose the right type of loan. Although it's a brilliant facility for repaying home loans, it is still unsuitable for every customer. Overdraft a home can save you interest costs and enable you to withdraw funds from your fixed limit. However, it doesn't fall under Section 80C of Income Tax and doesn't provide any tax benefits.
No comments yet