Home Loan Overdraft Facility

A home loan overdraft facility is linked to an overdraft (OD) account that allows you to deposit or withdraw funds as needed. Any additional amount you deposit acts as a lump-sum prepayment, helping reduce the outstanding principal and, consequently, the interest payable on your home loan. At the same time, you retain liquidity, since you can withdraw funds from the OD account whenever you require immediate cash.

This facility effectively combines the features of a home loan and a savings account, offering greater financial flexibility. It enables you to park surplus funds in the loan account to save on interest and withdraw them later when needed.

The key features of this facility include the following:

• The extra funds act as a pre-payment, reducing the outstanding principal

• Interest is charged only on the remaining balance after deducting the surplus

• Withdrawing the extra funds increases the outstanding balance and interest payable proportionately

• A linked savings or current account enables easy deposits and withdrawals

• Lenders determine the overdraft limit, typically around 25% of the total loan amount

• Terms and conditions of the overdraft facility vary between lenders

You can start using the overdraft facility once your lender approves it. The process works as follows:

• Transfer surplus funds from your linked bank account to your home loan overdraft account

• The lender treats the surplus as a pre-payment, reducing your outstanding principal

• Interest is charged only on the remaining balance after deducting the extra funds

• Withdrawing money from the overdraft account increases your loan balance and interest payable accordingly

• Your linked savings or current account enables easy deposits and withdrawals

• Some lenders provide a cheque book or debit card for convenient access to the overdraft account

For example, on a ₹30 Lakh loan with a ₹30,000 EMI, paying ₹40,000 in one month reduces interest on the extra ₹10,000. You can later withdraw this amount up to the bank’s permitted limit.

You can withdraw funds from your overdraft account to meet immediate cash requirements (usually up to 25% of the loan amount). The withdrawn fund value will add to the effective principal sum, which they will use to calculate interest charges on a daily basis. 

Here is how you can withdraw funds:

• Mobile and Internet Banking: Transfer funds anytime using online banking or mobile apps. Most lenders provide 24/7 access to your account. 
• Cheque Book and Debit Card: Some lenders offer cheque books or debit cards linked to the overdraft account, allowing you to withdraw cash or make payments directly. 

This facility is popular due to its flexibility and cost-effectiveness. Here are some of the advantages it offers:

• Flexibility to withdraw surplus funds from the loan account 

• Liquidity to withdraw funds during financial emergencies

• Reduction in the principal due and the total interest payable

• No extra pre-payment penalties

• Faster loan repayment

An overdraft facility comes with certain downsides, like:

• Higher interest rates than standard home loans

• Risk of financial pressure if your income is inconsistent

• Opportunity cost, as funds used in OD are not available for other investments

• No tax benefits on OD deposits

You can check if this facility is right for you by comparing it with a regular home loan. See the table below to identity the differences: 

This facility works best if you can consistently deposit extra funds into your OD account. Each additional contribution reduces your principal and lowers your interest payments. Consider this facility if:

• You can deposit surplus funds regularly without straining your finances

• You want to minimise interest costs

Consult your loan provider to understand the terms fully and opt for the facility only if you can maintain consistent contributions.