Overdraft on a Home Loan: A home loan is a type of loan that is used to finance the purchase of a home. It is usually a long-term loan with a fixed or variable interest rate that is repaid in monthly instalments over the loan’s life. Home loans can be secured by the home itself, meaning that the lender can seize the property if the borrower defaults on the loan. Home loans are frequently used by buyers who do not have the entire purchase price available in cash.
As a young couple living in India, Ravi and Priya had always wanted to own their own home. They had saved up enough money for a down payment and were excited to start the process of buying their first home. They visited several banks to compare mortgage rates before settling on one that provided a home loan overdraft facility.
What is overdraft facility?
Simply put, it is a feature that allows homeowners to borrow additional funds above and beyond the amount of their initial home loan. This can be useful for a variety of purposes, such as making home improvements or covering unexpected expenses.
How it works?
Assume Gaurav and Khusboo took out a home loan for Rs 20 lakhs. They have been making regular loan payments and have reduced their balance to 17 lakhs. They decide to do major renovations to their home, which will cost an additional Rs3 lakhs (approximately $4,000). Instead of taking out a separate loan for this renovation, they can borrow the additional funds through their home loan overdraft facility. This means that their home loan balance will rise from INR 17 lakhs to INR 20 lakhs, and they will be able to use the extra funds to fund the renovations.
It is critical to understand that a home loan overdraft facility is not the same as a line of credit. A line of credit enables homeowners to borrow and repay funds as needed, whereas a home loan overdraft facility allows them to borrow only once. This means that homeowners cannot borrow and repay funds indefinitely through this facility.
Overdraft on a Home Loan: Advantages
In India, there are a few advantages to using overdraft facility. For one thing, it may be more convenient than obtaining a separate loan. It is also easier to manage because homeowners only have to make one monthly payment rather than multiple payments for various loans. Furthermore, the interest rate on a home loan overdraft facility is frequently lower than that on a personal loan or credit card.
Overdraft on a Home Loan: Drawbacks
However, homeowners should be aware of the potential drawbacks of using overdraft facility in India. One potential downside is that it can increase the overall cost of the loan, as the interest on the additional funds borrowed will accrue over time. Homeowners must also be disciplined in repaying the additional funds, as failure to do so may result in financial difficulties.
