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Home Articles Should You Avail a Home Loan Overdraft Facility?

Should You Avail a Home Loan Overdraft Facility?

IndianMoney.com Research Team | Updated On Monday, June 24,2019, 11:42 AM

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Should You Avail a Home Loan Overdraft Facility?

 

 

Banks offer various facilities to home loan customers. Many people avail home loans for the long-term, with tenure of 20-25 years. For example if a home loan is taken for a period of 10 years, the customer must be confident of paying 120 EMIs (10x12) without fail.

If the customer misses 1 or 2 home loan EMIs anytime during the home loan tenure, there are consequences. You can avoid problems by availing a home loan overdraft facility.

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What is Home Loan Overdraft Facility?

A home loan overdraft facility is like a current account. This facility helps deposit surplus funds into a home loan account and the amount you deposit is considered as prepayment against the home loan principal amount. The bank revises the home loan principal amount in sync with periodic deposits and computes the interest considering the difference between the total deposits made and the outstanding principal amount.

If you avail a home loan of Rs 30 Lakhs at 10.1% interest for a term of 20 years, the monthly EMIs work out to be around Rs 29,150. If you take the first 2 years, around Rs 4,000 goes towards home loan principal repayment and Rs 24,800 towards interest repayments.

Let’s assume you have a surplus of Rs 2 Lakhs and make partial prepayment after paying 24 regular EMIs. The outstanding home loan falls to Rs 27,21,145. In this case, the home loan tenure also falls. While the principal-interest ratio remains unchanged, the bank revises the EMI.

See Also: What Is My Home Loan Eligibility?

Why Should I Avail a Home Loan OD Facility?

Unlike normal home loans, a home loan OD facility offers a few significant benefits.  It is strongly recommended for double-income families and businessmen who have surplus funds. There is no prepayment penalty on floating rate home loan. Additional benefits are offered to a home loan customer who maintains regular transactions. Choose the home loan OD option, if you can deposit extra funds.

Why Shouldn’t I Avail a Home Loan OD Facility?

Do not choose this facility if you are don’t have additional funds. Go for a normal home loan as a home loan OD facility is expensive. The money you deposit in a home loan account doesn’t enjoys Section 80C tax deductions. You do save on interest costs with home loan OD facility. Do a cost-benefit analysis before you make the final call.  

See Also: Tips For Home Loan EMI Repayment

Major Banks offering this facility

  • State Bank of India – SBI MaxGain
  • Bank of India- BOI Star Smart Home Loan
  • IDFC Bank-Short and Sweet Home Loan
  • Standard Chartered Bank- Home Saver
  • Citibank- Home credit
  • Axis Bank- Super Saver Home Loans

Interest Rate Comparison Between a Normal Home Loan and a Home Loan OD Facility:

Lenders

Normal home loan

Home loan with an OD

Processing fee

IDBI Bank

8.75-9.15%

9.35%

Up to Rs 5,000 plus applicable charges

PNB

8.65-8.75%

8.8-9.85%

0.35% of the loan amount

Bank of India

8.8-9.7%

8.8-9.7%

0.25% of the loan amount

Bank of Baroda

8.7-9.7%

8.7-9.95%

0.25-0.50% of the loan amount

Axis Bank

8.9-9.15%

9.2-9.35%

Up to 1% of the loan amount

Punjab National Bank

8.65-8.75%

8.80-9.85%

0.35% of the loan amount

State Bank of India

8.55 to 9.25%

8.6-9.75%

0.35% of the loan amount

Why are Home Loan Lenders Tightening the Rules Around This Facility?

The Home Loan OD facility was started for the first time by Multinational banks in India, followed by private and some public sector banks in India. It is not a profitable deal for banks, but beneficial to customers.

Therefore, many banks have discontinued the facility, while others are trying to regulate it. When the facility is offered, banks have to charge interest only on the outstanding home loan principal amount.

See Also: Ready For A Home Loan

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