Benefits of Home Loan Overdraft Facility for Self-employed Borrowers

Being self-employed has its share of benefits. Notably, you are your own boss and have the opportunity to pursue your passion while having the potential for higher earnings. Maintaining a work-life balance is also possible because your working hours are flexible.

Unfortunately, it is not all hunky-dory for self-employed individuals. One drawback is the complex management of cash flow. Income often fluctuates, and unexpected expenses can arise. In this context, a home loan may become a burden due to its longer repayment tenure, stretching up to 20-30 years. Often, this means you are paying more as the home loan’s interest exceeds the principal amount. As a self-employed individual, taking steps to make smart financial decisions can help you save up to lakhs on your home loan, and this is where the home loan overdraft facility presents itself as a viable financial tool.

Let’s explore the benefits of this flexible financial tool for self-employed borrowers.

What is a home loan overdraft facility?

A home loan overdraft facility is a financial product that combines the features of a home loan with a current account. Borrowers can deposit any additional lump sum amount over and above their monthly EMIs to their loan account. The additional amount remains in the loan account, and when required, borrowers can withdraw funds from the account. The interest is calculated on the outstanding balance, which leads to substantial savings for the borrower. For such additional deposits, a Current or Savings account is generally linked to the loan account.

This facility is particularly appealing to self-employed borrowers who require flexibility in managing their finances.

Advantages for self-employed borrowers

●     Improved cash flow management

Managing cash flow is critical for self-employed individuals. The overdraft (OD) facility allows borrowers to use their home loan account as a revolving credit line, offering them easy access to funds whenever required. Therefore, if you face income fluctuations, you can utilize the OD facility to bridge gaps during lean periods, ensuring there’s no hindrance to your business operations.

An overdraft can also help you address unexpected business expenses, such as raw material costs or equipment repairs.

Thanks to the overdraft facility on home loans, self-employed borrowers can manage loan repayments without facing financial strain while maintaining smooth business operations.

●     Potential interest savings

The potential for interest savings is one of the primary benefits of the overdraft facility. Interest is not charged on the entire loan amount but only on the outstanding balance. Borrowers can reduce the principal amount on which interest is calculated by depositing extra funds into the overdraft account. This results in lower interest costs over the loan tenure.

●     Flexibility in repayments

As discussed above, fluctuating income levels is a common experience among self-employed individuals. You might be going through the same. This can make it challenging to make fixed monthly home loan repayments.

By using the overdraft facility, you can make prepayments whenever you have surplus funds and then withdraw them during lean periods. It is this flexibility that is appealing to self-employed borrowers.

●     Emergency fund

Life is unpredictable. You may face personal or business emergencies without a warning. An overdraft can serve as an emergency fund to cover these expenses without disrupting your business operations.

●     Convenient access to funds

A home loan overdraft account functions similarly to a Savings or Current account. It offers easy accessibility to your funds, offering immediate liquidity. Self-employed borrowers can conveniently withdraw or deposit money via online banking, ATMs, or branch visits.

The overdraft amount can be paid at your convenience without rigid repayment schedules.

●     Higher loan amount

By utilizing the overdraft facility, you can potentially increase your overall borrowing capacity. This allows you to invest more in your property or business.

●     Secured loan

The overdraft is linked to your home loan. Hence, it is considered a secured loan. This often leads to lower interest rates compared to unsecured borrowing options.

What are the considerations and cautions?

Home loan overdrafts offer various benefits to self-employed borrowers, but it is essential to use them responsibly. Being overly dependent on overdraft facilities may lead to debt traps.

Consider the following:

●     No tax benefit for the surplus amount deposited in the home loan account. It does not qualify for Section 80 C of Income Tax Rebate because it is not treated as prepayment.

●     The interest rate of home loans with an overdraft facility is typically a notch higher than regular home loans.

Overall, it is considered that home loan overdrafts are much more expansive and they are a good move for self-employed borrowers if surplus funds are available. However, if there’s no chance of generating surplus funds, the home loan overdraft facility might not be the best move for you because you would be paying more for a benefit you cannot utilize.

What are the types of overdraft home loans available?

In India, there are primarily two types of overdraft home loans:

1.    Regular overdraft home loan

2.    Reverse mortgage overdraft home loan

The former allows borrowers to borrow against their existing home loan balance. The OD facility can be used as and when required, and the interest is paid only on the amount you have utilized. This type of loan is perfect for borrowers requiring a flexible source of funds for various purposes, such as business operations, home renovations, etc.

The latter is specifically designed for senior citizens owning a house but doesn’t have a regular source of income. In this type of loan, the lender offers a loan against the property and the borrower doesn’t have to make monthly repayments. The loan amount and the interest are repaid at the time of property sale or when the borrower passes away.

While there are several banks offering home loans with overdraft facilities in India, the best options are SBI, Tata Capital, and ICICI.

What are the eligibility criteria for a home loan overdraft facility?

●     You must be between 24 to 65 years of age

●     You must be a self-employed individual or a salaried person

●     You must have a good credit score

●     Consistent income, even with fluctuations, is critical

●     You must own a property with an existing home loan

Final Thoughts

For self-employed borrowers like yourself, a home loan overdraft facility can be a valuable financial tool. However, before opting for such a facility, you must do a cost-benefit analysis to find out whether the benefit of interest-saving through the home loan overdraft amount is more than the highest cost of the loan.