Home loan overdraft is a type of loan that allows borrowers to borrow money from their home equity, also known as short term credit.
Home Loan Overdraft Facility: Buying your own home is everyone’s dream and it is not easy. This requires a huge amount, so most people prefer to take a home loan for this. The tenure of the home loan can be from 20 to 30 years. If you choose a shorter tenure for this, then in such a situation the EMI burden may be high for you. Today’s financial institutions or banks understand the mental stress associated with it, which home loan borrowers have to face. To reduce this burden on home loan borrowers, banks keep on coming up with new facilities. One of them is the overdraft facility on home loans.
What is Home Loan Overdraft Facility
Home loan overdraft is a type of loan that allows borrowers to borrow money from their home equity, also known as short term credit. If you need money immediately in case of emergency and you do not have cash, then you can take advantage of this facility. However, it may also cost you dearly. Therefore, it is important to know how much an overdraft will cost before you can use it. Lenders generally charge higher interest rates on home loans with overdraft facility as compared to conventional home loans, hence, home loan borrowers should understand the pros and cons while availing this facility.
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Repayment Flexibility
This facility is for those borrowers who prefer to increase their EMI as their income increases. The extra money you put into your account reduces your total outstanding principal and interest. This method of expediting home loan repayment is a great way to speed up your long term debt. Also, through overdraft on home loan, you can avoid the high cost of prepaid penalties and still use your account as per the requirement.
Money can be withdrawn as per need
In home loan, overdraft works like an approved loan. Through this, money can be withdrawn as per the requirement and interest has to be paid only on the amount that you use.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 falls, you will benefit from it.
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Care must be taken before choosing it
Overall, this facility is better for those borrowers who often have short term surplus amount. Salaried employees who work on bonus, such people can deposit the extra money in their home loan account to reduce the total interest. If this facility is used properly, borrowers can pay off the loan faster without any prepayment penalty.
However, before opting for this facility, the borrowers should understand its advantages and disadvantages properly. This is because it is important to analyze properly how much you save on total expenditure. For example, the interest for this facility is 20-60 bps higher than for a regular home loan. Hence, when you opt for this facility and do not deposit enough surplus funds, you may end up paying a higher amount. Hence, home loan overdraft is a better option for those who have a large amount of surplus amount. Also, most of the people take this facility thinking that they will get interest on the amount deposited. But, it is important to note that this facility only helps in reducing the total interest and not earning from it.
(By Atul Monga, Co-Founder & CEO, BASIC Home Loans)
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