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A home loan overdraft facility is linked to an OD account that allows you to deposit and withdraw funds, whenever needed. This lump-sum payment helps you prepay the home loan, reducing the outstanding principal amount and the final interest liabilities. Additionally, you also enjoy liquidity benefits with the option of withdrawing funds from the OD (overdraft) account to meet immediate cash requirements.

Benefits of a Home Loan Overdraft Facility

Benefits of a home loan overdraft facility include: 

  • 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 prepayment penalties

  • Faster loan repayment

How does an Overdraft Home Loan Function

Under a home loan overdraft facility, your lender links your home loan account with a current or savings bank account where you can deposit surplus funds. Any surplus amount, post deducting the loan EMI amount, is considered as prepayment for the loan. Each prepayment lowers your interest burden since interest is calculated on the outstanding loan amount. You can also withdraw funds from this account to meet immediate cash requirements (usually up to 25% of the loan amount). The withdrawn fund value is added to the effective principal sum, which is used to calculate interest charges on a daily basis.

Regular Home Loan vs Home Loan Overdraft Facility: Key Differences

The main differences between a regular home loan and a home loan overdraft facility are as follows:

Parameter

Regular Home Loan

Overdraft Facility

Interest Calculations

Done on the outstanding principal amount

Done on the book balance (calculated as outstanding loan amount + surplus funds available in the home loan overdraft account)

Withdrawal of Surplus Funds

The surplus amount paid towards home loan prepayment is automatically deducted, making them unavailable for withdrawing

The surplus amount added to the overdraft account can be withdrawn anytime.

Account Status After Full Repayment 

The home loan account is closed permanently after the total outstanding principal (plus interest) is paid

The overdraft account remains active even after the loan is repaid

Prepayment Effect 

Prepayment can reduces your outstanding balance

Prepayment can increase the available withdrawal balance in the OD account and can reduce the outstanding home loan amount

The home loan overdraft facility is perfect for borrowers with a regular and stable source of additional income. If you have such regular surplus inflows, and require liquidity, opting for a home loan with overdraft facility would be prudent.

FAQs on Home Loan Overdraft

Can I take out an overdraft on a home loan?

Yes, you can avail an overdraft facility on a home loan or a loan against property. You can also avail an overdraft facility on home loan top-ups or on transferred home loan balance, provided the lender offers such overdraft facilities.

How to withdraw money from a home loan overdraft account?

As your home loan account is connected to your savings/personal account, you can transfer money from one account to another at any given point. Most lenders allow you to do so via their mobile or online banking platforms. Lenders may even offer ATM-cum-debit cards and cheque books for physical withdrawals. Once you have withdrawn money from your overdraft account and transferred it to your bank account, the outstanding principal and the interest payable will be adjusted accordingly.

Does one have to pay a fee for renewing their home loan overdraft facility?

Some lenders charge a fee for renewing home loan overdraft facilities, while some do not. You should check such fee details with the lender before opting for the facility. 

Are interest rates for home loans with overdraft facilities higher than regular home loans?

Yes. Generally, home loans with an overdraft facility come with a higher rate of interest than regular home loans. 

What are the demerits of a home loan with an overdraft facility?

Demerits of a home loan with an overdraft facility come with higher rates of interest and miss out on tax benefits u/s 80(C). Moreover, parking your surplus funds into the OD account bars you from investing the funds in other financial instruments that can bring you potentially higher returns than the interest savings on the loan.

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