Before opting for the home loan overdraft facility, borrowers need to weigh the actual advantages and disadvantages and then proceed with it.
It’s nearly impossible to ignore the struggles that aspiring homeowners face. With multiple challenges to get on the housing ladder, repaying a home loan is a serious commitment that can extend for 20 or even 30 years. The other challenge for borrowers is the high EMIs if chosen for a shorter tenure.
New-age financial institutions understand this financial and psychological burden that a consumer goes through. To reduce the burden, banks keep coming up with new facilities. One of them is an overdraft facility on a home loan.
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Home loan overdraft is a type of loan that allows borrowers to borrow money from their home equity, which is also called short-term credit. This facility can be helpful if you need to make an emergency purchase and don’t have the cash on hand. But it can also be expensive. So, it’s important to know how much an overdraft will cost before you use one. Let’s read below to know the pros and cons for the same and who should go for it.
Repayment flexibility: This facility is for those borrowers who prefer to increase their EMIs whenever their income goes up. The extra money that you put into your account lowers your total outstanding principal and the interest outgo. This way to accelerate repayment of home loans is a great way to clear your long-term debt faster. Also, with an overdraft on a home loan, you can avoid the high cost of prepaid penalties and still be able to use your account as required.
Facility to withdraw surplus: In comparison to normal home loans, overdraft home loan accounts help borrowers retain liquidity. So, whenever you require funds, you can withdraw a surplus amount from your account. This type of facility is helpful to meet any financial emergency such as home expenses, weddings, other debts etc, without opting for a personal loan. Home loan borrowers who think they are short on cash must avail of this facility as it offers much-needed flexibility without affecting your credit score.
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Pay as you use: The overdraft in a home loan works like an approved loan. As per the requirement, money can be withdrawn and the interest has to be paid only on the amount that you use. This is because the interest rate on this facility is linked to the prime interest rate and if it drops, you will benefit from the same.
Bottom Line
In a nutshell, the product is very powerful for those borrowers who frequently have access to short-term surplus. As is evident, salaried employees who work on bonuses and businessmen with cyclical sales can deposit the extra earned money into their home loan account to lower the total interest outgo. If the facility is used in a planned manner, the borrower can pay off the loan faster without incurring any prepayment penalty.
However, before opting for this facility the borrowers need to weigh the actual advantages and disadvantages and then proceed with it. This is because it is important to be cautious while analysing how much you save on the total outgo. For instance, the interest for this facility is 20-60 bps higher than a regular home loan. So, when you go to this facility and do not deposit enough surplus funds, you might end up paying a higher amount. Therefore, home loan overdraft makes sense for those who got a large surplus amount in hand.
Also, most take this facility with an 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 outgo and not earn through it. Hence, before settling, read the terms and conditions carefully to make an informed choice and to enjoy maximum benefits.
