Home Loan: Understanding 'Home Loan Overdraft' facility, how it works, its benefits

Home Loan: A home loan is a type of loan used to finance the purchase of a home. It is typically a long-term loan, with a fixed or variable interest rate, and is repaid in monthly instalments over the life of the loan. 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 often used by buyers who do not have the full amount of the purchase price available to pay in cash.

Home Loan Overdraft: As a young couple living in India, Ravi and Priya had always dreamed of owning 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 went to a few different banks to compare mortgage rates and eventually decided to go with one that offered them a home loan overdraft facility.

What exactly is a home loan overdraft facility?

Simply put, it is a feature that allows homeowners to borrow additional funds beyond their initial home loan amount. This can be useful for a variety of reasons, such as making home renovations or paying for unexpected expenses.

Here's how it works: let's say Ravi and Priya took out a home loan for INR 20 lakhs (equivalent to about $27,000). They have been making regular payments on this loan and have reduced their balance to INR 17 lakhs (about $23,000). They decide they want to do some major renovations on their home, which will cost an additional INR 3 lakhs (about $4,000). Instead of taking out a separate loan for this renovation, they can use their home loan overdraft facility to borrow the additional funds. This means that their home loan balance will increase from INR 17 lakhs to INR 20 lakhs, and they can use the additional funds to pay for the renovations.

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One important thing to note is that a home loan overdraft facility is not the same as a line of credit. A line of credit allows homeowners to borrow and repay funds as needed, while a home loan overdraft facility is only available to borrow once. This means that homeowners cannot continually borrow and repay funds using a home loan overdraft facility.

Benefits of home loan overdraft: 

There are a few benefits to using a home loan overdraft facility in India. For one, it can be more convenient than taking out a separate loan. It can also be easier to manage, as homeowners only have to make one monthly payment instead of multiple payments for different loans. Additionally, the interest rate on a home loan overdraft facility is often lower than the interest rate on a personal loan or credit card.

However, it is important for homeowners to be mindful of the potential drawbacks of using a home loan 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. It is also important for homeowners to be disciplined in repaying the additional funds, as failing to do so could result in financial difficulties.