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Why Banks Are Tightening the Rules around Home Loan Overdraft

By Finserv MARKETS - Dec 4,2019
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Banks Tightening the Rules around Home Loan Overdraft

Many home buyers consider home loan overdraft as the best way to finance the purchase of a home. It is important to understand how a home loan overdraft works and how it benefits borrowers.

What is an overdraft?

An overdraft is a facility offered under a home loan account where you can set aside an additional amount towards the loan. This amount can be considered for prepayment. It is deducted from the principal amount. Through this, you can save on the interest payout because the interest will be charged on the principal amount of the loan. When the loan amount reduces, the interest payout is also low. Additionally, there is an option to withdraw the parked amount as per your convenience. However, if you withdraw the amount, it will increase the outstanding home loan balance.

Benefits of a home loan overdraft account

With an overdraft account, you can manage to save a significant amount of interest without going through the burden and paperwork of transferring the balance to a lender that offers a low-interest rate. This facility also offers high liquidity because you can withdraw the money whenever you need it as opposed to a regular prepayment wherein the money is gone permanently.

As per financial experts, the interest saved is interest earned; hence, you may consider selecting this option and park the excess funds in a home loan overdraft account. Even a small reduction in the interest outflow will help you close the loan sooner. If you are a business professional or live in a family that has more than one salaried individual, this facility is ideal for you as the chances of surplus funds are high.

Why are banks holding back on home loan overdraft accounts? 

Only certain banks are offering the option of home loan overdraft. Although it is beneficial for borrowers, it is not a profitable deal for lenders. This is why banks are becoming stringent about this facility. Some lenders have discontinued the product and many have announced restrictions on it. Lenders face dual loss in the scheme. One is the interest amount they lose because borrowers park excess funds in the overdraft account. Secondly, banks have to offset the risk of a high loan amount through a process known as provisioning. They need to set aside an amount that is equivalent to the loan amount. While they do not earn interest, they need to maintain an amount equal to the loan amount and this could lead to trouble. When borrowers make use of the overdraft facility, banks not only lose out on interest income but also make provisions for outstanding debts with the funds that can be utilized for other revenue-earning opportunities.

It is because of the above-mentioned reasons that banks are making the product less of a liability for them. Many also charge an annual fee on the account. With the restrictions imposed by banks, the product has become less attractive for borrowers. This ultimately helps the bank stay away from losses.

If you are looking to avail a loan with flexible repayment tenure, you can opt for home loans available at Finserv MARKETS. Bajaj Finserv home loan comes at a promising interest rate. You can apply for a home loan online from the comfort of your home. Also, the documents required for home loan application are minimal. This makes the entire process of availing the loan even more hassle-free. While availing a home loan, you must check the clauses associated with the prepayment of home loan. Make a note of the prepayment charges, late payment penalties or any other charges before availing a home loan. This will help you avoid any inconvenience in the later stages.

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522