By Santosh Agarwal
Many home loan borrowers tend to prepay their home loans with the objective of reducing their total interest cost. However, another smart way of reducing home loan interest cost is to opt for a home loan overdraft facility. This facility offers significant advantages in the form of higher interest savings and instant liquidity.
Home loan overdraft facility allows home loan borrowers to deposit their surpluses in the linked home loan overdraft account, which is usually offered in the form of a current account. The average balance maintained in this overdraft account is deducted from the outstanding loan amount while calculating the interest component for the linked home loan.
This helps in reducing the total interest cost for the home loan borrowers. Thus, depositing surpluses in the overdraft account plays the same role as prepayments do for reducing the overall interest cost.
Offers liquidity
The flexibility to withdraw from their parked surpluses helps borrower tos meet any short-term fund shortage. This feature makes an excellent option for home loan borrowers facing frequent cash flow volatilities. Such borrowers can use their home loan overdraft account to save their interest cost without compromising their liquidity to meet unexpected cash needs.
Borrowers can also park their emergency fund in the home loan overdraft account which would also generate higher returns than parking emergency funds in savings accounts.
Higher rates
Given the higher liquidity and flexibility offered through the home loan overdraft option, lenders usually charge slightly higher interest rates for home loan overdraft products than their regular home loan products. Hence, choose home loan overdraft option only after doing a proper cost-benefit analysis. Opt for a home loan overdraft scheme only if it results in net savings in interest cost after factoring in its higher interest rates.
Home loan applicants seeking to reduce their overall interest cost without compromising their liquidity can opt for a home loan overdraft facility. Even existing home loan borrowers serving regular home loans can enquire with their existing lenders about the availability of home loan overdraft options.
Section 80C of the Income Tax Act allows home loan borrowers to claim tax deduction on their home loan principal repayments made through EMIs as well as through prepayments. However, the surpluses parked in the overdraft account do not qualify for the Section 80C deduction even though these are treated at par with prepayments for home loan interest calculation.
If their existing lenders do not offer home loan overdraft schemes, then they can transfer their existing home loans to lenders offering the same. Borrowers requiring large cash balances to deal with unpredictable cash outflows can also use this facility to make an optimum use of their cash surpluses.
