Home Loan schemes with an overdraft option helps save time & money

If you are thinking of taking a home loan and are confident of generating a surplus every month after paying the regular EMI, you can opt for loan schemes with an overdraft facility that not only cut interest payments significantly, but also reduce the loan tenure. State Bank of India, Standard Chartered Bank, HSBC and Central Bank of India offer such home loan products.

Under the scheme, as a home loan borrower, you can deposit any surplus that you have into the home loan account, though you retain the option of withdrawing the sum, if required. By depositing an amount higher than your EMI, you save on interest outgo. The principal amount on which the loan interest is calculated is the outstanding principal minus the savings deposited in the Smart Home account every month, over and above the EMI.

THE ADVANTAGES

Essentially, such home loan schemes work like current accounts with an overdraft limit. They also let the borrower maintain liquidity of his or her savings because the surplus funds parked in the current account are available for daily banking transactions.

Keeping any surplus in loan accounts is of greater value than investing in fixed deposits. This is more tax-efficient as interest saved via such schemes is not taxable, whereas the income earned is. If the excess funds were to be invested in interest bearing instruments, the interest earned would attract income tax and the effective rate of earning would be much lower. In fact, even if you are already servicing a regular home loan, you could look at switching to banks that offer overdraft-linked home loan schemes. The effective rate of interest will certainly be lower compared to the conventional home loan products.


THE COSTS

The main drawbac
k of such schemes is the higher interest rate—up to 25 basis points— compared to a regular home loan. Also, the product may not work favorably if you don't use the account for regular transactions. You should ensure that your routine banking transactions are carried out via this account. Maintaining a balance that is equal to 2-3 EMIs will also help deliver the results.

DOES IT SUIT YOU?

Such schemes may particularly appeal to double-income families who are in a relatively comfortable financial position. It's best to evaluate the terms and conditions of the schemes and, more importantly, assess your future income and savings. You need to ascertain whether your budget will allow you to make the most of the scheme's feature to offset higher interest rate of around 25 basis points that these schemes carry.

Borrowers who have surplus funds to park in the account, over and above the monthly EMI, should consider this product favourably since the savings on net monthly interest payments would justify the additional premium they pay for this feature. If you are servicing a regular home loan and plan to switch to such schemes, you need to carry out a cost-benefit analysis to ascertain whether a simple prepayment would be cheaper.



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