Home Loan Overdraft Facility: Should you opt for it?

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Home loan overdraft facility allows borrowers the flexibility to withdraw from their parked surpluses to meet their financial goals or fund shortages.

Home Loan Overdraft Facility: Should you opt for it?

Lenders usually charge slightly higher interest rates for home loan overdraft products, given that it offers higher liquidity and flexibility. (Image: Freepik)

In a bid to reduce the overall home loan interest cost, home loan borrowers either prepay their home loans or transfer their existing loans to other lenders charging lower interest rates. However, another smart way to reduce the interest cost is to opt for the home loan overdraft facility, also termed as home loan interest saver or smart home loans.

Let’s look at the pros and cons of opting for the home loan overdraft facility:

Pros

# Reduces overall interest cost through prepayment in the form of parked surplus

This facility allows the borrowers to deposit their surplus funds into the linked home loan overdraft account, which is usually in the form of a savings or current account.

The excess funds in this overdraft account act as a prepayment against the outstanding principal, since the average balance maintained in this account is deducted from the outstanding loan amount at the time of calculating the interest component. This reduces the housing loan’s overall interest cost.

# Retains liquidity by allowing the flexibility to withdraw funds whenever required

Home loan overdraft facility also allows borrowers the flexibility to withdraw from their parked surpluses to meet their financial goals or fund shortages. As these accounts are in the form of savings or current accounts, they offer instant liquidity to the borrowers. Hence, home loan borrowers availing this facility can even park their earmarked emergency fund in the linked overdraft accounts, and save on their interest cost without compromising their liquidity.

Cons

# Interest rates are a notch higher than those of regular home loans

Lenders usually charge slightly higher interest rates for home loan overdraft products, given that it offers higher liquidity and flexibility. Hence, you should opt for the home loan overdraft facility only after doing the cost benefit analysis to calculate whether the interest cost derived through the surplus parked in the home loan overdraft account would outweigh the higher interest cost of this home loan option. Else, the higher interest rate of the home loan overdraft option would attract higher interest cost than the ones incurred on regular home loans.

Who should opt for a home loan with an overdraft facility?

Home loan applicants planning to prepay their loans in the future to reduce their overall interest cost while also retaining their liquidity to make withdrawals should opt for home loan saver loans. The flexibility to deposit and withdraw allow borrowers to park their emergency fund in the linked overdraft accounts.

The only flip side is that their interest rates are usually higher than regular home loans. Opt for this facility only if the benefit of interest saving through surplus parked in the home loan overdraft account is likely to outweigh the higher interest cost of this home loan.

Even existing home loan borrowers serving regular home loans can enquire with their existing lenders about the availability of the home loan overdraft option. In case their existing lenders do not offer home loan overdraft facility, they can transfer their existing home loans to lenders offering home loan overdraft facility.

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