Can a home loan overdraft save you lakhs in interest?

A home loan OD can lower interest costs and shorten tenure for borrowers with surplus cash

- APRAJITA SHARMA

You have taken a home loan and want to pay it off early. But when bonuses, business income or other windfalls arrive, you face a trade-off: use the money to reduce the loan or keep it available for emergencies and other needs.

A home loan overdraft (OD) account is designed to address that dilemma. It allows borrowers to park surplus funds against their home loan while retaining access to the money when needed. The catch is that OD loans typically carry a slightly higher interest rate than a regular home loan. For borrowers who maintain sizeable savings balances, however, experts say the structure can still generate substantial savings despite the higher rate.

What is a home loan OD?

A home loan OD combines the features of a home loan and an overdraft account. Any money parked in the linked OD account is treated as a reduction in the effective loan outstanding for interest calculation purposes. Interest is charged only on the net outstanding amount after adjusting for the balance maintained in the OD account.

The facility has been around for years under SBI Maxgain and Bank of Baroda Home Loan Advantage. Yet it is relatively underutilized because many borrowers are unfamiliar with how it works and whether it suits their financial situation.

How does it work?

If a borrower has a home loan outstanding of ₹1 crore and maintains ₹15 lakh in the linked OD account, interest will be charged only on ₹85 lakh.

Unlike a regular part-prepayment, the money parked in the OD account remains accessible and can be withdrawn whenever required. The trade-off is that home loan OD products typically carry a slightly higher interest rate than standard home loans. Because interest is charged on a lower effective loan balance while the EMI changes only marginally, a larger portion of each EMI goes toward principal repayment, helping shorten the loan tenure.

How much can a borrower save?