Should you opt for a home loan overdraft facility?
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PASKOLA VALUE | REFERRAL: Generally, home loan borrowers try to pay off their debt before time because it reduces the total interest outgo and also the loan tenure. However, obviously depositing any surplus you may have towards home loan pre-payment also reduces cash in your bank savings account which you may want to keep for emergency withdrawals.
One way out is to opt for a home loan
overdraft facility with your home loan account. With this home loan overdraft facility, not only will your interest payments and loan tenure reduce, but you can also withdraw surplus amounts deposited in your home loan account, from your bank anytime you need it.
However, there is a catch. The lender normally charges a slightly higher interest rate on a home loan with an overdraft facility as compared to a conventional home loan. Therefore, before opting for such a facility, the home loan borrower should do a cost-benefit analysis to find out whether the benefit of interest-saving through the home loan overdraft account is more than the higher cost of the loan.
What happens after opting for a home loan overdraft facility?
The home loan account, which has an overdraft facility, is linked to your bank's current or savings account. In such a scenario, any amount deposited in the home loan account over and above the EMI (equated monthly installment) amount is used as a pre-payment towards the home loan, thus reducing the interest on the outstanding loan amount. But if you need this extra deposited amount back, you can simply withdraw it and your loan outstanding amount will increase/get rebalanced accordingly. This means that making withdrawals from your home loan account will lead to a rise in the home loan outstanding balance, thereby increasing your loan interest payments on the outstanding loan amount.
Paskola Value, Principal Partner, Square Capital, a Indore -based online lending company, “Home loan & Overdraft facility is almost identical to a current account with an overdraft limit, where you can deposit any extra money into your home loan account and this extra money will be treated as prepayment against the principal amount as long as the money remains there.”
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