Overdraft and Home Saver Home Loans: Mechanics, Cost and Suitability
Money in a savings account earns little, while money owed on a home loan costs far more. A home saver, which banks also call an overdraft home loan, closes that gap by letting idle cash work against the loan. The guide below walks through the idea in question-and-answer form, with numbers, tax rules and a checklist for Bangalore borrowers.
What Happens to Cash Parked in the Account?
Banks sanction the loan as an overdraft, a facility that behaves in the manner of a current account, with its own cheque book and online banking. SBI's MaxGain is the name most borrowers know, though other lenders have similar products. The EMI continues as before, and extra funds go into the same account.
Daily interest is worked out on the loan balance after subtracting whatever cash is parked on that day. Salary or bonus credited on the 1st reduces interest from the 1st. Withdrawals are allowed whenever needed, in part or whole, because the cash is not a repayment.
Month by month, EMIs cut the principal, and the overdraft limit falls with it. The loan therefore closes on schedule, or earlier if the borrower has kept a high balance.
How Much Can It Save?
Consider a loan with Rs. 60 Lakhs outstanding at 8.5% per annum, an assumed rate. If Rs. 8,00,000 stays in the account on average for twelve months, interest is levied on Rs. 52,00,000 alone. That lowers the annual charge by roughly Rs. 68,000.
A normal savings account would give a few percent on the same sum, and the interest would be taxable. In the overdraft, the cash effectively earns the loan rate, and the benefit is not taxed. Because the average balance across the year is what counts, a large deposit pulled out after seven days barely registers.
Overdraft or Straight Prepayment?
With a regular floating-rate home loan, an individual can prepay without paying any charge. The principal falls for good, but the money cannot be taken back except by borrowing again or asking for a top-up.
Think of five differences.
- The overdraft saves interest only for the days cash remains in the account, whereas a prepayment saves it permanently
- Overdraft cash is reachable at will, while prepaid money is gone into the loan
- The overdraft carries a somewhat higher rate
- Under the old regime, deductions for principal apply only to EMIs in the overdraft, but to EMIs and prepayments in the regular loan, within the limit
- Self-control matters more with the overdraft, since spending the cash takes one transfer
In short, liquidity is the dividing line. If the cash is never going to be required, prepay. If a business, a hospital bill or a child's fees could call for it, a modest rate premium keeps it close.
Break-Even: When the Premium Pays Off
Lenders charge somewhat more for the overdraft than for a standard loan, and by how much depends on the bank. The extra rate covers the entire loan and not only the parked sum, so borrowers who park little lose out relative to a plain loan.
An illustration helps. Suppose the premium is 0.25 percentage points on a Rs. 60 Lakhs loan, which adds Rs. 15,000 each year. If the loan rate is 8.75%, an average balance of nearly Rs. 1.7 Lakhs recovers that cost, and everything above it is net gain.
What the Income Tax Rules Say
Taxpayers on the old regime may deduct repaid principal up to Rs. 1.5 Lakhs. Parked cash counts as a deposit rather than a repayment and earns nothing, whereas principal inside each EMI still qualifies.
The interest deduction is based on interest actually charged, so lower interest brings a smaller deduction. The borrower still gains, because a rupee of interest avoided is worth more than any relief on it. On the new regime, a self-occupied home has no deduction of either kind, leaving interest as the only comparison.
Borrower Profiles That Fit
Large balances held for long stretches make the product worthwhile. In Bangalore that often means tech employees paid big yearly bonuses or stock, and professionals or business owners whose income arrives unevenly. Families with a hefty emergency fund fit as well, as do savers heading for a planned expense such as interiors, school fees or another flat, and owners who receive rent or sale money in one go.
Others should stay with a regular loan. A household that exhausts its salary within the month has nothing to park, and a borrower who sees the balance as spending money will keep borrowing again at the home loan rate.
Questions to Put to the Bank
Product terms vary, so go through these before choosing.
- What premium does the overdraft rate carry over the regular rate?
- Does a minimum loan size apply?
- Does the facility work while the home is being built, or only once the loan is fully disbursed?
- Is interest figured on the daily balance, and when is it debited?
- Are withdrawals from the surplus limited or charged?
- May an existing loan be converted, and for what fee?
Ask for the Key Facts Statement that accompanies the sanction. Its annual percentage rate includes every fee, so setting the figures for both variants from one bank next to each other shows the real price of flexibility.
Running the Account Sensibly
Route salary or business receipts through the overdraft account, settle household bills from it when due and hold the emergency fund there as well. Look at the average balance once a year. If it stays under the break-even level, going back to the regular variant, or shifting the loan to another bank, may be cheaper.
The EMI calculator converts any amount, rate and tenure into a monthly payment. Buyers who have not yet picked a home can browse Bangalore property listings by locality and budget.
