Home Loan Overdraft Facility or EMI based Home loan: A comparison

Home Loan Overdraft Facility or EMI based Home loan: A comparison


July 18,2019

Do you have any home loan? Are you planning to buy a home or take a home loan? Then you should be aware of the term Home Loan Overdraft. Yes, this can help in many ways so let’s see what is Home Loan Overdraft Facility?

Buying a home is an achievement but having a home loan on your head is a big burden and people try to pay it off as soon as possible so that they can live freely without carrying any tension. Every individual who doesn't have any other source of income apart from Job or business to fund the EMI or Loan amount always worry until the home loan is paid because of the uncertainty of their job and business. Moreover, the home you bought is not fully yours until you pay the whole amount to the lenders, the continuous missing of payment can cost you your home. Home loan tenure is of usually 20-30 years and no one knows what hold in future so people always look to settle as soon as possible by paying any surplus amount they receive but banks have restriction on limited pre-payment per year, so how can you pay more?

What is a Home Loan Overdraft facility?
Home Loan Overdraft Facility is like a Current account with an overdraft limit. You can deposit extra amount over and above your monthly installment and this extra amount will be as a prepayment against your home loan thus reducing the interest burden on the outstanding loan amount. The final outcome of such monthly deposits is a significant reduction in the tenure of the loan which allows the loan repayment faster.

With Home Loan Overdraft Facility you can make continuous surplus pre-payment. Yes, this facility provides you with HL Overdraft account where you can deposit regular surplus amount against your home loan. You do not earn any interest on this but your interest liability and principal amount directly reduced over the period. Home Loan Overdraft facility is designed for people who want to make a regular part payment without any restrictions and get access to the same fund during an emergency which is usually not possible in regular Home loan. Here people can enjoy the best of both the worlds but this facility can work for people who have regular surplus income.

Home Loan Overdraft Facility v/s EMI based Home loan

Surplus Amount
The benefits of Home Loan overdraft facility is for those who have surplus income regularly and therefore can pay the loan without any restrictions while in regular EMI Home loan you cannot pay the surplus amount regularly. It is advisable to open home loan overdraft only if you are confident of having the regular surplus amount or this account would be little expensive and would not be of any use to you.

Loan Repayment
In Home Loan overdraft facility your loan is repaid quickly due to the regular surplus amount which is not possible in regular Home loan due to the restrictions and it takes little longer time.

In Home Loan overdraft facility even if you pay the regular surplus amount over EMI; you can still withdraw that surplus amount in case of an emergency which is not possible in a regular home loan.

Interest liability
You do not receive any interest for the surplus amount deposited in a Home Loan overdraft account but the amount is used to reduce the interest liability and principal loan amount. While if your surplus amount kept in the fixed account would have generated interest and that could have been used to pay your loan amount would have reduced the interest liability and principal loan little more.

Prepayment penalty
In Home Loan overdraft facility there are no prepayment penalties while with the regular home loan you need to pay certain pre-payment charges.

Any surplus amount deposited in Home Loan overdraft account doesn't earn interest so it's not taxable which is good but you won't get any benefit of tax exemption under 80C as it is not considered as loan prepayment While interest earned on fixed deposits is taxable but you can save on tax exemption under regular home loan

Interest Rates
Home Loan overdraft facility is little expensive as interest rates are higher while a regular home loan is little cheap due to the lower interest rate.

Principal Amount v/s Interest Rates
In home loan overdraft facility principal amount deducted is more than the interest rates so you usually save more while for a regular home loan, in initial years you pay more on interest and less principal amount so you end up paying more interest due to long tenure.

Before applying, do proper calculations and research so that you can decide which one works for you. Did you love this article? Pass on this piece of information to your friends and families so that they can take advantage of it. Also, let us know your feedback through comments below. If you looking for any home loan overdraft facility? mail us on contact@meraemi.com

All articles of meraemi are to guide users to take better financial decisions that’s why we make sure we convey the best opinions which are not influenced by any brands. If you have any loan running, You can create your EMI portfolio tracker to periodically track your loans and get valuable tips to save on interest rate and find ways to pay it off asap only on meraemi.com

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