Thinking of prepaying your home loan? Prepaying your loan has two vital benefits: It shortens your loan tenure and saves you a lot on interest outgo. However, directing more funds towards your loan repayments can shrink your cash flow for emergencies. Not to mention, some lenders may charge fines or penalties for making prepayments.
One option to overcome these challenges is opting for a home loan overdraft facility. But is it better than conventional housing finance options?
Let’s analyse it by weighing the pros and cons.
How does the overdraft facility work?
Before we move on to discuss whether it’s good for you or not, let’s understand how home loan overdraft works.
With an overdraft facility, you’ll get a dedicated savings/bank account, which will be linked to your loan account. Any amount you deposit in this account, which is over the specified EMI amount, will be treated as prepayment. However, the amount will be treated as a prepayment as long as it’s still deposited. During the loan tenure, you can withdraw and deposit this surplus amount anytime.
Like traditional housing finance options, the surplus amount deposited will be deducted from the remaining principal amount to calculate the interest payable. The interest is calculated daily and will be debited at the end of the month.
Moreover, if you withdraw a sum that exceeds the account balance, you’ll be charged interest only on that amount and for the period for which it was withdrawn.
Additional Read: Top Things to keep in mind before prepaying Home Loan
Pros of overdraft facility
An overdraft facility allows seamless prepayment of a loan to buy a house, allowing you to shorten your loan tenure and reduce the interest payable.
With it, you have the provision of withdrawing the surplus amount during financial or medical emergencies.
Unlike traditional loans, there is no penalty or fine for prepaying your loan.
The surplus amount can be deposited or withdrawn at your convenience, thereby offering excellent liquidity.
Cons of overdraft facility
In contrast to traditional housing finance options, lenders charge relatively higher home loan interest rates for the overdraft facility. Thus, loans with an overdraft facility are a slightly expensive option.
The surplus amount is not eligible for tax deduction under section 80C of the Income Tax Act.
Also, if you don’t have a regular influx of surplus income, managing an overdraft facility can get a bit challenging.
Lastly, you can easily make money through interests by investing your surplus income in a savings account or fixed deposit. Therefore, using your surplus income to prepay your loan may not always be a financially sound move.
Additional Read: Dos and Don’ts for a Home Loan Prepayment
Before settling for an overdraft facility, it is essential to conduct a cost-benefit analysis. Analysing this will help you determine if the amount saved on prepayments is more than the cost associated with a traditional loan.
If you’re looking for a home loan to buy a house, look no further than Tata capital. Our loans are an ideal solution to all your home buying requirements. We offer attractive interest rates, which you can enjoy easily with our simple application process, quick disbursals, and minimal documentation. Check your home loan eligibility on Tata Capital’s website.