Pros And Cons Of Opting For A Home Loan Overdraft Facility

If you are planning to buy a home or refinance a property, your mind automatically turns towards a traditional home loan. However, in the competitive banking world of today, you must have heard about the word home loan overdraft facility. This is a relatively new concept in home financing and also offers some flexibility, but it doesn’t suit everybody.

Let’s break it down into simpler terms so you can make an informed decision about whether this may be the right move for you.

What is a Home Loan Overdraft Facility?

But before we get into more details of the pros and cons, what is a home loan overdraft facility? In simple words, it is a form of home loan in which you can withdraw money from your loan account than the outstanding loan balance up to a certain limit. Think of it as a credit line tied to the home loan.

You can deposit money into this account at any time. You will be charged interest only on the outstanding balance and not the full loan amount. So, it is highly flexible like having an open-ended loan that adjusts according to your change in finances.

Advantages of Choosing Home Loan Overdraft Facility

• Interest Only on the Outstanding Balance :- Here, interest is charged only against the amount that you have withdrawn and not the whole loan. Hence, if you have significant amounts of money sitting in your account, it can minimize the burden of interest. It may be a huge benefit if you are good at handling cash flow and can avoid paying more than you should.

• Quick Access to Funds :- Life is unpredictable, and hence, unforeseen situations may arise, as you will never know when you may require some urgent medical treatment or home repair. The overdraft facility enables immediate access to funds, and you do not need a loan application or paperwork for this. It can be a big advantage of a home loan overdraft facility.

• Flexibility in Repayment :- For traditional home loans, fixed monthly payments are commonly expected. But with an overdraft facility, you can always supplement your payments and only pay off the part of the principal balance if you feel like it. Moreover, you can withdraw funds when necessary, hence making you much more flexible with finances.

• Enhances Financial Discipline :- Conversely, the overdraft facility can even prompt better financial behavior. Since you are allowed to pay in and change your balance, you will behave yourself and make strategic payments to keep your debt below the mark. Overdraft becomes a good facility for people whose income or expenses are fluctuating. They help to smoothen out cash flow and help to maintain financial discipline.

Cons of Having a Home Loan Overdraft Facility

• Higher Interest Rates :- Though interest is only charged on the amount you withdraw, home loan overdraft facility often comes with higher rates than traditional home loans. If you don’t monitor your withdrawals regularly, you may find yourself paying a lot more for interest over the long term.

• Risk of Over-Borrowing :- Because the money is available whenever you want it, there is a temptation to borrow more than you need especially if you’re not disciplined about managing your finances. Surprisingly, you may end up in a bigger amount of debt without being aware of it.

• Requires Active Financial Management :- To fully benefit from a home loan overdraft facility, you have to monitor your financial situation closely. That means tracking how much money comes in and how much money is going out. If you are one of those who hate micromanaging your finances, this might get stressful.

• Credit Rating :- Over-reliance on overdraft facilities can work against your credit score, especially when you mismanage the overdraft facility. Sometimes you may miss repayments, which may give creditors signals that you are a high-risk borrower, which means it will be difficult for you to access credit in the near future.

Is It Right for You?

Whether you can opt for home loan overdraft facilities or not? It solely depends on your situation. If you can respect flexibility and are mindful of your finances, this should be a pretty good fit. You borrow only when necessary and pay off the interest perfectly.

But if you are one of those who want a more structured, predictable loan repayment plan and do not want to face the risk of over-borrowing, then you may stick with a traditional home loan.

Bottom Line:

A home loan overdraft facility is a two-edged sword that can serve you a great deal in terms of finance but requires discipline and smart planning to use carefully.

If you are considering this path, make sure you read the fine print involving the fees, as well as how it will serve your financial goals. It can be the best solution to make your money work for you, or perhaps it will come with some unpleasant surprises if you don’t investigate it well enough.