Prepayment of home loans has two critical benefits: firstly, it saves the interest outgo and secondly; it reduces the home loan tenure. However, most lenders levy fines and penalties on the borrowers for making prepayments. Not to forget, paying over the stipulated EMI amount can reduce the cash flow for emergencies.

One option to overcome these limitations is by opting for an overdraft facility. However, the question remains – is it better than the conventional home loan? 

Let’s analyze its pros and cons to find out more.

What Is an Overdraft Facility?

An overdraft facility is a loan agreement between the lender and the borrower, linked to a bank or savings account. The facility allows borrowers to withdraw or ‘overdraw’ sums that exceed the current balance in their linked account, and up to an approved credit limit.

Interest is to be paid only on the amount withdrawn and only for the time it is borrowed. Furthermore, the borrower has to provide collateral to avail the overdraft facility.

How Does It Work for Home loans?

Your home loan account with an overdraft facility is linked to a dedicated bank/savings account. Any amount deposited in home loan account – that is over and above the stipulated EMI amount – is treated as a prepayment for the housing loan principal amount, for as long as it remains there. 

During the tenure, borrowers can deposit as well as withdraw the surplus money in the account, anytime. Like conventional home loan plans, the surplus sum deposited in the account is deducted from the outstanding principal loan amount to calculate the interest payable. However, the interest is calculated daily and debited at the end of each month.

Likewise, when the borrower withdraws the surplus amount from the account (exceeding the account balance), the interest payable depends on the amount withdrawn and the period for which it was withdrawn.

Pros

• Allows prepayment of home loans and consequently, brings down the overall loan liability by reducing the home loan interest rates and shortening the loan tenure.
• Facility users can withdraw the surplus amount deposited in the home loan account during financial emergencies.
• Unlike conventional home loans, there is no penalty for the prepayment of the home loan amount.
• The surplus amount can be withdrawn or deposited at convenience, offering greater liquidity.

Cons 

• In comparison to conventional easy home loan plans, lenders charge a slightly higher home loan interest rate in India for the overdraft facility. Thus, making it a more expensive option.
• The surplus amount used to prepay the housing loan is not eligible for rebate under the Section 80C of the ITA. 
• Lastly, managing the overdraft facility is difficult without a regular surplus income.

Experts suggest conducting a cost-benefit analysis to determine if the home loan interest saved on the prepayment is more than the cost of servicing a regular home loan – before settling for the overdraft facility.

Nonetheless, before buying a house remember to use a home loan EMI calculator and then apply for a home loan online or offline. This way, you will be able to check your home loan eligibility and to estimate the EMI amount, you can make a more informed choice.

The possibility that an accident or illness, suddenly occurring, affects our day-to-day life and prevents us from working is a relatively frequent problem. Statistics show that the unemployment rate for persons with disabilities is 26%, over five times higher than the 5% rate for persons without disabilities.

There is a risk that an accident or illness could deprive us of the ability to carry out our work permanently and it is disability insurance, which is often included in the life insurance offer, that can provide solutions to these dramatic situations.

In disability coverage, it is considered as sinister when, due to a physical or mental deficiency, a person’s inability to perform certain activities occurs. Any injury that the insured suffers unintentionally by a sudden action of an external force, as a consequence of an accident, and that causes him invalidity would be covered by this insurance. It can also occur as a consequence of an illness that results in the loss of power to do any job.

However, in the eyes of insurance companies, we can distinguish different types of disability, and for each of them, we can find one answer or another in life and disability insurance policies. It is important to know because when insurance compares life to include this coverage will be very useful to assess the different insurance offers. Professionals at Valent Legal can further help you in understanding all this and more. 

Types of Disability Insurance Policies

• Short Term Disability Insurance Policies

These policies pay monthly benefits up to two years term. They are appropriate for people who do not have significant savings and have an immediate need for income.

• Long Term Disability Insurance

These policies pay monthly benefits for more than two years and can pay benefits up to the age of 65. They are appropriate for people who have enough savings to meet immediate income needs but would be affected by the catastrophic consequences associated with long-term disability.

Qualities of a Disability Insurance Policy

You establish the conditions under which the person will start receiving disability benefits. Some insurances only cover disability caused by accidents. It is preferable to look for insurance that covers disabilities caused by accidents or illness.

One should also look at the insurance company’s definition of disability in order to establish how they measure the level of disability. The best policies pay benefits if the person is unable to do their regular job. Policies that only pay benefits if the person cannot do any kind of work are more restrictive.

Renewal clause

Preferably the policies should guarantee the automatic renewal of the policy regardless of the health of the person. Other policies guarantee that premiums cannot increase. Policies that guarantee renewal and the cost of disability insurance offer the best alternative.

Guaranteed Insurability

If the insured person’s income increases in the future, this clause allows him to increase the disability benefit regardless of the state of health.

Partial Disability Benefits

Some policies only pay benefits if the person cannot work fully. The best policies pay benefits, even if the person can work partially. In that case, the benefit will be adjusted proportionally.

Adjustment for Cost of Living

This clause establishes that the disability benefit will be gradually increased to offset the effect of inflation.