Most of the people taking home loan want to repay the loan before the stipulated time, so that the interest is less and the loan period also gets reduced. But to make prepayment, you often have to withdraw money from your savings. If you opt for the home loan overdraft (OD) facility, you can also save interest and withdraw the extra money deposited when needed.
However, there is a catch in this. Home loans with overdraft facility usually charge slightly higher interest rates than normal home loans. Therefore, it is important to weigh the advantages and disadvantages properly before taking a decision.
What happens after availing overdraft facility?
When you opt for an overdraft home loan, your loan account is linked to your savings or current account. Any additional money you deposit over and above the EMI is considered as prepayment. This reduces the loan outstanding and charges less interest. If you need that money later, you can withdraw it anytime. As soon as the money is withdrawn, that amount is again added to the loan, due to which the outstanding increases and the interest also increases accordingly.
How is interest calculated?
In this facility, interest is charged on the basis of daily reducing balance. The bank checks your balance every night and after deducting the money in the account from the total loan, it charges interest only on the remaining amount. Suppose, Suresh has taken a home loan of Rs 80 lakh at 9% interest and his EMI is Rs 81,141. If he deposits Rs 10 lakh in his account on 15 February 2026, then the bank will charge interest only on Rs 70 lakh on that day. If the balance remains at Rs 2 lakh the next day, interest will be charged at Rs 78 lakh. Due to this, the interest portion in the EMI of March will reduce and the principal portion will automatically increase.
Benefits of home loan overdraft
Depositing extra money reduces the effective loan outstanding and saves a good amount of interest in the long run. The deposited money can be withdrawn as and when required, which is not possible in normal prepayment. Due to less interest being charged, more part of the EMI goes towards repaying the principal amount, which reduces the loan tenure and also reduces the total expenditure.
What is the disadvantage of this feature?
The interest rate on overdraft home loans usually ranges from 0.10% to 0.30%. As per income tax, the additional amount deposited in OD account does not get tax exemption under Section 80C, because it is not considered as formal prepayment.
Who is this feature suitable for?
This facility is more beneficial for those people who often have extra money left in their income. Like businessmen, self-employed people or those salaried people who keep getting bonuses. Such people can save interest by keeping money in the account and can also withdraw it when needed.
Take OD or invest elsewhere?
It depends on whether the returns you get by investing elsewhere (after tax) are higher than the interest on your home loan or not. According to Raj Khosla, Founder, MyMoneyMantra.com, overdraft gives you secure returns equal to loan interest, whereas investments like mutual funds can give higher returns in the long run. OD is better for those who like low risk and loans with high interest. If the return from investment is more than the loan interest, then invest. If the loan interest is high, then OD account can be a better option.