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Tata Capital > Blog > Loan for Home > Overdrafts on home loans: Eligibility, benefits & charges

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Overdrafts on home loans: Eligibility, benefits & charges

Overdrafts on home loans: Eligibility, benefits & charges

A home loan overdraft (OD) facility links your home loan to a current account or flexible savings account. You can add surplus funds to this account to immediately lower the principal balance and save on interest. These surplus deposits act as prepayments. Unlike regular prepayments, you have access to the parked funds, which you can withdraw and use whenever you require cash. The Equated Monthly Installments (EMIs) remain fixed under a home loan overdraft facility, unless you deposit additional funds to reduce your overall loan tenure and total interest burden.

An overdraft facility against a home loan acts like a bank account, offering the benefits of higher interest savings and instant liquidity.

Imagine you have some extra money sitting idle in your bank account while you are paying full interest on your home loan. What do you do? You reach out to your lender requesting a home loan overdraft facility. This solution links an overdraft account, similar to a savings or current account, with your home loan. When you deposit surplus funds into this account, your outstanding loan balance for interest calculation is reduced. As a result, you save on interest costs.

In this article, you will learn what an overdraft facility in a home loan is, how it works, who can apply for it, the key benefits, and the charges involved.

What is a home loan overdraft facility?

A home loan overdraft facility works like an overdraft account linked to your home loan. It allows you to deposit extra money into the linked account after paying your regular Equated Monthly Installments (EMIs). This surplus reduces the effective loan balance, with interest being charged only on the net outstanding amount. Consequently, a home loan overdraft facility lets you save on interest and repay the loan faster.

The highlight of an overdraft facility against a home loan is that the deposited surplus funds remain accessible and can be withdrawn whenever needed. So, the facility is a flexible option for borrowers who regularly maintain surplus funds. Many banks offer such products under different names, such as Maxgain or Home Saver-type. They provide both flexibility and interest savings.

How does a home loan overdraft facility work?

Now that you’ve understood what an overdraft facility is in a home loan, let’s understand how it works through an example. Suppose your outstanding home loan is Rs. 20 lakh, and you deposit a surplus of Rs. 2 lakh in the linked account. The bank charges interest only on the outstanding balance of Rs. 18 lakh. This helps you save on interest and may also help you repay the loan faster. However, the extra Rs. 2 lakh you deposit is not locked in. You can withdraw it whenever you need cash. The tenure for the overdraft facility against a home loan is the same as the underlying home loan and remains active throughout the loan period.

What are the differences between a home loan overdraft and a regular home loan?

The differences between a home loan overdraft and a regular home loan are covered in the table below:

AspectHome loan overdraft facilityRegular home loan
Interest calculationInterest is charged on the net outstanding amount after adjusting surplus funds parked in the linked account.Interest is charged on the full outstanding loan balance.
LiquiditySurplus funds remain withdrawable whenever needed.You can not withdraw prepaid amounts.
Interest rateSlightly higher than a regular home loan.Usually lower.
SuitabilityBest for borrowers with regular surplus cash and liquidity needs.Suitable for borrowers seeking a simple, lower-cost loan structure.

What is the eligibility for a home loan overdraft facility?

The eligibility for a home loan overdraft facility is as follows:

1.    New and existing borrowers:

The facility is usually available to both new home loan applicants and existing borrowers, subject to lender approval.

2.    Basic loan eligibility:

You must satisfy the lender’s standard home loan eligibility requirements.

3.    Stable income profile:

Lenders generally prefer borrowers with a stable income and repayment capacity.

4.    Surplus fund availability:

Borrowers who regularly maintain surplus funds may benefit more from this facility.

5.    Good credit score:

A strong credit history and satisfactory credit score can improve approval chances.

The eligibility criteria vary across banks and housing finance companies. Fulfilling them is essential to getting an overdraft facility against a home loan. Note that not every lender offers an overdraft facility. Moreover, it may not be available with all home loan products.

What are the benefits of a home loan overdraft facility?

Here are the benefits of a home loan overdraft facility:

1.    Interest savings:

When you park extra funds in the linked account, it can reduce the effective loan balance, lowering the interest charged.

2.    Easy liquidity:

The surplus amount remains accessible and can be withdrawn whenever needed.

3.    Flexibility for variable income:

It is useful for self-employed individuals or borrowers with irregular cash flows.

4.    Prepayment-like advantage:

It helps reduce interest costs without permanently locking money into the loan.

5.    Tax treatment:

Section 80C does not consider parked surplus as the principal repayment. The benefits of Section 24(b) apply only to the interest actually charged. You must consult a tax advisor for guidance.

What are the charges and costs of a home loan overdraft facility?

A home loan overdraft facility comes with the following charges and costs:

  1. Processing fee: Banks may charge a processing fee when setting up the facility.
  2. Higher interest rate: The interest rate is often slightly higher than a standard home loan.
  3. Maintenance charges: Some lenders may levy annual maintenance or renewal fees.

How to calculate your interest savings using an overdraft calculator?

You can estimate your interest savings using a home loan overdraft facility calculator. It typically requires five inputs:

  1. Loan amount – Outstanding home loan
  2. Interest rate – Annual rate charged by the lender
  3. Loan tenure – Remaining loan period
  4. Average surplus parked – Extra money deposited in the overdraft account
  5. EMI details – Fixed EMI amount

Here’s an illustration to help you get a better understanding:

Outstanding loan amount = Rs. 20 lakh

Interest rate = 9% per annum

Average surplus = Rs. 2 lakh

Amount on which interest is calculated = Rs. 18 lakh (Rs. 20 lakh – Rs. 2 lakh)

The annual interest on Rs. 20 lakh at 9% is about Rs. 1.80 lakh, while on Rs. 18 lakh it is about Rs. 1.62 lakh. This can result in savings of around Rs. 18,000 per year, subject to the actual loan balance and surplus maintained. You can also use an online EMI calculator to estimate the monthly installment amount.

Who should opt for a home loan overdraft facility?

You should opt for a home loan overdraft facility if you regularly have surplus funds and want to save interest without losing access to your money. The financial solution is an ideal choice for business owners, freelancers, professionals, and others with uneven or seasonal cash flows. However, you can benefit from an overdraft facility only if you can consistently maintain a surplus balance.

The following checklist will help you understand if the facility is right for you:

  1. You regularly have extra money after meeting expenses.
  2. Your income is variable or comes in lumps.
  3. You want liquidity along with interest savings.
  4. You are disciplined about keeping surplus funds parked in the account.

Conclusion

A home loan overdraft facility allows you to park surplus funds into a linked account, reducing your existing loan balance and the interest charged on the loan. The best part about the facility is that the funds parked in the account are accessible to you for future needs. However, before you choose an overdraft facility, you must compare the benefits against the typically higher interest rate and any processing, maintenance, or renewal charges. Disciplined borrowers with consistent surplus cash flows can gain maximum value from the facility.

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FAQs

What is a home loan overdraft facility?

A home loan overdraft facility links an overdraft account to your home loan. Any surplus funds deposited in this account reduce the effective loan balance, helping you save on interest while keeping the funds accessible.

How does an overdraft facility against a home loan work?

For an overdraft facility against a home loan, lenders calculate interest on the loan balance after adjusting the surplus funds parked in the linked overdraft account. The more surplus you maintain, the lower the interest charged on the loan.

Is a home loan overdraft cheaper than a regular home loan?

Not always. Overdraft home loans often have slightly higher interest rates than regular home loans. However, if you maintain a substantial surplus, you may save more on interest overall.

Can I withdraw the surplus I park in the overdraft account?

Yes. One of the key benefits of an overdraft home loan is that the surplus funds remain accessible. You can withdraw them whenever you require, depending on the lender’s terms and conditions.

What charges apply to a home loan overdraft facility?

The charges applied to a home loan overdraft facility include processing fees, annual maintenance or renewal fees, and a slightly higher interest rate. The exact costs vary across lenders and home loan products.

How do I calculate interest savings on an overdraft home loan?

To calculate interest savings on an overdraft home loan, you will need to estimate your average surplus balance and subtract it from the outstanding loan amount. Lenders charge interest on the reduced balance. You can use an overdraft calculator for quick and accurate calculations of interest savings.

Can existing home loan borrowers switch to an overdraft facility?

Some lenders allow existing borrowers to convert or refinance their home loans into an overdraft facility. The availability depends on lender policies. Check the eligibility criteria and the specific loan product before proceeding.

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