How smart home buyers can use home loan overdraft (OD) account to save interest

A home loan overdraft (OD)account is a special facility that links your home loan to a savings account. It allows you to deposit surplus funds (like salary savings or bonuses) into this linked account.

How a home-loan overdraft account works

You continue paying your monthly EMI as usual. You can deposit any extra funds (savings, bonuses, idle funds, etc.) into your overdraft-linked account.

How is the interest calculated?

Benefits of a home loan overdraft account

• The deposited surplus directly reduces your loan balance, saving you significant interest over time.

• You can withdraw your surplus funds whenever needed. It’s not a fixed prepayment.

• Since less interest is charged, a greater portion of your EMI goes toward the principal. This effectively shortens the loan tenure and reduces total cost.

"This is one of the best products for all home loan buyers, whether you are a salaried or a businessman. Salaried employees can park their additional monthly savings and bonuses that they have in the OD account, so that they save interest on the amount lying here. Even for professionals/ businessmen who have temporarily idle funds can park the money here," said Ronak Morjaria, Partner at ValueCurve Financial Services.

What is the drawback of a home loan overdraft account?

• Home loans with OD facilities often come at a 0.10% to 0.30% higher interest rate compared to regular home loans.

• From an income tax perspective, the surplus amount deposited in the OD account does not qualify for the Section 80C of Income Tax rebate, as it is not treated as a pre-payment.

The decision between a home loan OD account and a regular EMI home loan ultimately depends on the borrower's financial habits and income flow. While the regular EMI loan is more appropriate for disciplined borrowers with fixed income who prioritise the lowest rate and Section 80C tax benefits, the OD account is better for borrowers with surplus cash and variable income seeking to save interest while retaining full liquidity.