Borrowers should also be aware of the downsides of this product. The interest rate on it is usually 20-50 basis points higher than on a regular home loan. “Opt for this facility only after doing a cost-benefit analysis: Will the savings in interest cost by parking your surpluses in the home loan overdraft account outweigh the higher interest cost of this loan?” says Ratan Chaudhary, head of home loans, Paisabazaar.com.
A tax deduction is available under Section 80C of the Income Tax Act
on repayment of home loan principal to the extent of ~1.5 lakh each year. However, any surplus that the borrower deposits to the linked account is not treated as principal repayment, and he does not get a tax deduction on it.
Savvy investors can, instead of depositing their surplus savings into the linked account, invest in financial instruments that earn a higher rate of return. “If you can earn a higher return by investing your surpluses in other assets, then using them for home loan repayment would be counter-productive,” says Tripathi.
The home loan overdraft facility works best for the self-employed and businessmen who have fluctuating cash flows. Salaried individuals who get high bonuses or incentives in lump sum can also take advantage of it. “Opt for home loan overdraft facility only if you have surplus funds available with you often. Otherwise, given the higher interest rates of these loans
vis-a-vis regular home loans, you will end up incurring a higher interest cost on this facility,” says Chaudhary.
Take into account your long-term financial plan and savings potential before opting for this facility. “High repayments on the home loan could affect your regular savings, which may not be financially prudent. Repaying over a longer period will also help you save for the future. Only those who have sufficient savings for the future should repay their home loan within a short period,” says Tripathi.