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How Overdraft Facility on Home Loan Affects Bank Profits?
How Overdraft Facility on Home Loan Affects Bank Profits?
Find out how changes in the home loan overdraft facility by banks will impact the customer.

Home loan overdraft accounts are affecting bank profits, which may lead to revisions in the terms and condition of their offering.

A home loan overdraft option allows borrowers to deposit extra funds or the advance on the loan in a dedicated savings account linked to their home loan account. If money in the account is in excess of the EMI amount, it is treated as pre-payment towards the loan. This effectively brings down the liability, and interest is charged only on the balance.

Home loan overdrafts are on an average 25 basis points more expensive than a regular home loan. However, banks stand to lose out on the interest income due to no prepayment charges.

Reports suggest that while most banks are not completely shelving the product, they are adding additional clauses to make it more restrictive. Some banks have set the ceiling on the money in overdraft accounts at half the value of the loan, while others are offering such products only for smaller loan amounts. Some banks are also charging an annual fee on the balance amount in the overdraft account at the end of the loan's term.


Our Take

The biggest advantage of the home loan overdraft facility to customers is that there are no penalty charges for prepayment of the loan amount. It also provides for a more convenient repayment option, which can significantly reduce the total interest outgo. This facility is feasible for people who have a chance of earning surplus funds. It saves them from hefty prepayment charges against a charge for availing the overdraft facility.

Making changes to the scheme would prove to be disadvantageous for the customer

Source

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