• Home Loan Overdraft Facility

    Introduction

    “Home is where the heart is” – This phrase says a lot about the importance of a home in our lives, signifying the basic essence of human nature. We spend all our lives trying to find a place we can call our home, putting in sweat, time and blood to turn a dream into reality. With the cost of living increasing every day, the basic essence of owning a home gets harder, and this is where banks and financial institutions come in. Almost all banks offer home loans or overdraft facilities to aid our dream, helping us build a foundation on this amount, quite literally.

    What is a home loan overdraft facility?

    An overdraft is similar to a loan in some ways, enabling individuals to withdraw money from an overdraft account, i.e. the bank gives you credit. A home loan overdraft facility is traditionally an account linked to your housing loan, providing you an opportunity to withdraw money from this account. The bank will charge an interest for the money withdrawn by you from this account and a repayment period will be set within which this amount has to be repaid.

    Working of a home loan overdraft facility

    Under a traditional home loan scheme, a borrower is provided a certain sum of money as a loan by the bank, which should be repaid within a certain period at a specific interest rate. A home loan with an overdraft facility enables a borrower to withdraw certain sums from an overdraft account which is directly linked to the home loan. This, in essence allows you to take money as per your requirements, with an interest charged on the amount you have availed in the form of an overdraft. The amount is not given as a lump sum, as is the case in a loan, but can be withdrawn as and when you require financial assistance. The amount which is not utilised under the overdraft facility will not be charged interest (in most cases).

    Typically, some form of security or collateral needs to be provided in order to avail an overdraft against your home loan.

    Advantages of home loan overdraft facility

    A home loan overdraft facility offers a host of advantages to borrowers, some of which are mentioned below.

    • Fast and simple

      – Applying for an overdraft facility is fast and simple, minus any hassles related to applying for a loan.
    • Property utilisation

      – It enables an individual to utilise an unused/free property to avail funds, thereby unleashing the full potential of an asset.
    • Liquidity

      – An overdraft helps you maintain liquidity in terms of your savings, as you can use the money from an overdraft as and when you need it.
    • Interest

      – Interest is charged only on the amount of money withdrawn and not the entire amount available.
    • Contingency

      – The money available in the form of an overdraft can act as a contingency fund during emergencies.

    Why banks offer overdraft facilities?

    From a business perspective, one might wonder about the benefits a bank could get by offering overdraft facilities to individuals. Firstly, a bank is able to earn interest on the amount used by you through your overdraft facility, adding to their fund corpus. Secondly, the security/collateral provided in order to avail an overdraft ensures that the risk component involved in this kind of lending is reduced significantly.

    When should you opt for a home loan overdraft facility?

    It’s easy to jump the gun when thinking about your financial condition, applying for a home loan when it isn’t absolutely essential at times. Given the number of options available to us, it is also possible to be overwhelmed and opt for a loan which doesn’t meet your requirements. So when should you opt for a home loan overdraft facility? The following points could help you figure this out.

    • When you’re unsure as to the amount of money required at a particular instance and a loan amount could be excessive. An overdraft enables you to withdraw amounts which suit your needs at a particular instant.
    • When you don’t mind paying an interest only on the amount you’ve withdrawn. Under a traditional loan, one pays an interest for the entire loan amount but under an overdraft you pay only for the amount you withdraw.
    • When you have an unused property which you think can be put to better use.
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