What is home loan overdraft

I have heard that some banks are offering mortgage as an overdraft facility for home loan borrowers. How does such a facility help? Which banks are offering such a scheme?

Hi,

The idea behind Home Loan with a overdraft facility is to make use of your deposit in current or savings account to offset some part of the principal. Once a part of the principal is offset, your interest obligation comes down. Let’s understand this with an example.

Suppose Jagan, instead of paying Rs. 5 lakhs as prepayment, deposits Rs. 5 lakhs in his current or savings account which was linked to his home saver account and left it. His interest obligation would have been calculated not on the loan outstanding but on the loan outstanding minus Rs. 5 lakhs. What’s more? Jagan can withdraw this money or a part of it whenever he wants it. Let’s see how this works.

It can be clearly seen that the borrower has saved more than Rs 3,000 in the first month itself. This saving can be humongous if you consider the fact that you have to pay the EMI for next several years.

What if you do not have Rs. 5 lakhs in your current/savings account? In that case, even when you deposit a recurring amount in your account, this deposit will be subtracted from principal outstanding to calculate the EMI. The savings would be less in initial months but will compound in the later part of the tenure. So, it’s your EMI that goes down and not your tenure. Many banks offer such a Home Loan facility including SBI and Axis Bank.

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Cheers,
BB Expert