The plain-vanilla home loan is a common product that most customers are aware of. A variant of the product that allows you to do more with your loan account, and with greater flexibility, is the overdraft facility that is added to it.

This feature that allows you to withdraw money from your overdraft account has been around for many years now. State Bank of India (Maxgain) was among the earliest to offer this facility. Many others have been offering the overdraft variant for a few years now, including Axis Bank, ICICI Bank, Bank of Baroda and Punjab National Bank. The overdraft account comes with different names from specific banks – Money Saver, Super Saver, Max-Saver, etc.

For borrowers looking for a loan product that gives added flexibility, here’s more on the home loan overdraft facility.

How the product works

The basic functioning of the home loan overdraft account is similar to that of a regular home loan. Once your home loan amount and the interest rate are decided, your EMI (equated monthly instalment) is fixed accordingly.

But the similarity ends there. In the overdraft home loan, your EMI is split into two accounts involved. One is your basic loan account where interest and principal of the loan are serviced. The other is a surplus or overdraft account where savings from interest payment or excess sums parked are used.

The overdraft home loan account is usually linked to your savings bank account.

In the basic home loan amortisation schedule, you are given the split of interest and principal repayments.

In an overdraft home loan account, the principal portion of the EMI is the same as given in the original amortisation schedule.

But the interest portion depends on the loan outstanding, which is calculated on a daily reducing basis. So, if you have some excess money in your savings account that is moved to the overdraft account or if you park surplus after receiving your bonus, the principal outstanding gets reduced by that amount and the interest is calculated accordingly.

So, if you have, say, ₹50 lakh loan outstanding and park a surplus of, say, ₹1 lakh in the overdraft account, your interest for the subsequent month will be calculated based ₹49 lakh. The sum of the original amortisation schedule principal component and the interest in the reduced balance of the loan outstanding is usually less than the original EMI. The excess amount is added to the overdraft account as surplus for the next month. If the original amortisation schedule had ₹7,500 as principal serviced for the month, the loan outstanding would be ₹50 lakh minus ₹7,500.

The biggest advantage of the overdraft account is that you can withdraw the excess amount at any time for your emergency requirements. In the above example, you can withdraw the ₹1 lakh as per your requirement. Banks offer internet banking, debit cards or cheque books for allowing withdrawal of surplus sums.

Unlike a regular home loan where interest is calculated on a monthly basis, an overdraft home loan follows a daily mode of calculation for interest. So, even if you park surplus funds for a few days, there is benefit in the form of lower inflows.

In case you withdraw the surplus, the interest calculation changes accordingly.

Your overdraft home loan account will state how much is the loan outstanding, how much you can withdraw, etc, very clearly.

Is it advantageous?

The overdraft home loan, given the flexibility it offers, may be suitable for many types of borrowers. In particular, the self-employed or business persons who face the problem of uneven cashflows may find the account useful. Even the high earning salaried that regularly maintain substantial savings account balances may find the overdraft home loan beneficial. The interest savings from EMI getting added to your overdraft account is a key positive factor.

SBI Maxgain offers an interesting illustration. Let’s take an example of a ₹50-lakh home loan with 10 per cent interest and 20-year tenor. If the person taking the loan earns ₹2 lakh per month, spends his salary amount evenly across the 4-5 weeks in a month, calculations show that she will have a ₹2-lakh total saving in outgo, compared to a regular term home loan.

Many banks are known to charge 20-30 basis more for overdraft home loans compared to regular home loans.

If you use the surplus judiciously and do not withdraw excess amounts regularly, it may be useful for you by reducing interest outgo. There are no prepayment charges if you decide to repay your entire loan with the excess amounts you have in the overdraft account when they become large enough.

There is, however, no tax benefit for the excess amount parked in the overdraft account.

Related Topics
comment COMMENT NOW