A financial facility or tool known as an overdraft facility allows you to withdraw money from your bank account (savings or current), even if there is no money in the account. The term “overdraft” refers to a credit line provided by a lender that allows the borrower to deposit monies above the loan’s maximum and withdraw those funds as needed.

This is very similar to the overdraft facility in a mortgage. The lending institution gives you access to an account with an overdraft limit that is ordinarily equivalent to the balance of your outstanding mortgage. Depositing funds into the account will allow you to make the loan repayment. Any additional deposit is regarded as a prepayment that lowers the loan’s outstanding principal and interest expense. Additionally, you may withhold up to the permitted amount and repay with interest. A mortgage pre-approval may result in a hard inquiry on your CIBIL score, which may be seen on the CIBIL score app if you seek for credit. 

Understanding Home Loan with Overdraft Facility

If you decide to use the home loan overdraft facility, your home loan account will be linked to either your current or savings account. Your home loan account receives all of your repayments. Prepayment of the house loan is any sum that is greater than the EMI. The extra money reduces your main balance, which lowers your interest payment on the mortgage. The sooner you can pay off the home loan, the more you deposit into the account. You can make a direct transfer of money from your savings account to your account for your mortgage. 

You can take money out of your home loan account in the same way that you can prepay the loan with additional funds. Any money removed must be reimbursed, along with any applicable interest. The amount removed results in an increase in the principal and interest on your mortgage. Each borrower who chooses the overdraft option is qualified for a particular maximum amount from which the withdrawal can be made. Withdrawals are prohibited after the cap. Usually, it might be up to 25% of the loan amount. However, it might change based on internal bank policies. 

The borrowers may use the amount taken out of the overdraft facility for private purposes.. It can be used to finance education, a wedding, or the purchase of consumer goods like appliances and electronics. Even when the home loan is entirely repaid, one may still use the overdraft option. As stated in the terms and circumstances, interest charges apply. 

You might be wondering how to withdraw funds from a home loan overdraft facility. Your savings or current account will be connected to your home loan account. You can move funds from the overdraft account to the savings account if you need to take a withdrawal. This is very similar to securing a bank loan. After the withdrawal or excess amount deposit, the repayment or tenure will be reformed. In addition, some lenders offer checkbooks and ATM/Debit cards specifically for use with the overdraft account to carry out a variety of transactions. 

The interest rates on the overdraft facility are a little bit higher than those on standard home loans because it offers flexibility. 

Benefits of Home Loan with Overdraft Facility

The following are the key benefits of a home loan with an overdraft facility:

Lowers the overall cost of interest

“When calculating the interest component, the average balance of the linked account is subtracted from the total amount of the outstanding loan, according to Ratan Chaudhary, director of home loans at Paisabazaar.com.

Additionally, the surplus money kept in this account functions as a prepayment against the outstanding principal, lowering the total interest paid on the mortgage.

Eliminate prepayment penalties

According to RBI standards, prepaying floating-rate home loans does not result in prepayment or foreclosure fees. However, lenders may impose these fees on fixed-rate loans. Prepayment penalties can be avoided with a home loan overdraft option.

Flexibility to take money out as needed

House loan debtors benefit from the ability to deposit and withdraw excess funds from the overdraft account because doing so would reduce their liquidity, which would be jeopardized if they were to foreclose on their house or make a partial prepayment. While doing all of this, keep an eye on the CIBIL score app to CIBIL score check free.

Exploring the Features of Home Loans with Overdraft Facility

Home loans with an overdraft facility offer borrowers a unique and flexible financial tool that provides several advantageous features. This innovative feature allows homeowners to manage their finances more effectively and make the most of their mortgage repayments. Let’s delve into the key features of home loans with an overdraft facility:

1. Withdrawal and Repayment Flexibility: One of the standout features of a home loan with an overdraft facility is the flexibility it offers in terms of withdrawals and repayments. Borrowers can withdraw funds from their home loan account as needed, similar to making a prepayment. This enables them to utilize the surplus money for various purposes, such as funding education, weddings, or purchasing consumer goods. Additionally, borrowers can make repayments directly into the home loan account, reducing the outstanding principal and overall interest burden.
2. Linked Savings or Current Account: With a home loan overdraft facility, borrowers typically have linked savings or current accounts. This account is connected to the home loan account, allowing for seamless transfers between the two. If a borrower needs to withdraw funds, they can transfer money from the overdraft account to their savings account, providing easy access to funds whenever required.
3. Overdraft Limit: Each borrower is eligible for a specific maximum amount as their overdraft limit. This limit determines the amount that can be withdrawn from the overdraft facility. Usually, it is a percentage of the loan amount, such as up to 25%. However, the exact limit may vary based on the internal policies of the lending institution.
4. Chequebook and ATM/Debit Card: Some lenders provide checkbooks and ATM/debit cards exclusively for use with the overdraft account. This allows borrowers to carry out transactions conveniently and access funds whenever needed. Whether it’s making payments or withdrawing cash, these additional features enhance the usability of the overdraft facility.

Conclusion

Not all financial institutions offer this option. Therefore, before selecting a lender, take into account all elements, including terms and restrictions. You’ll be better able to make decisions, pay off your debt, and pay less in interest. For a quantitative analysis, use the CIBIL score app for a CIBIL score check free.