In our previous article, we explained redraw facility – a feature in home loan packages that many new homebuyers have problem understanding. In this article, we shall look into another common home loan feature that many inexperienced consumers may find confusing, and that is the Overdraft facility (in a home loan).
First Off, What is Overdraft?
An overdraft is an extension of credit from a lending institution when an account reaches zero. In layman’s term, it is when a bank allows you to withdraw money from an account, even though you have no funds in the said account. Basically, it is just like borrowing from a bank.
Nowadays, many banks offer accounts with overdraft facilities. The amount that has been “overdrawn” is, of course, subject to interest and repayment terms previously agreed upon between the bank and the account holder. Usually, there is a fixed amount as to how much the account holder can access using overdraft, known as “Authorized Overdraft Limit”.
So, How Does Overdraft Work in a Home Loan?
When you understand how overdraft works, then an overdraft feature in a home loan becomes easier to understand.
Working pretty much in the same principle as a “conventional” overdraft, a home loan with an overdraft facility enables you to withdraw money you don’t have from an account that is linked to your home loan. This is despite the fact that you effectively still owe money to the bank (in the form of your home loan). Of course, all this takes place under a predetermined interest rate as well as repayment terms and conditions which have been set by the bank.
Why Would the Banks Allow Me to Access Money I Don’t Have?
When you utilize the overdraft facility of a home loan, you are essentially borrowing against the equity of your home (i.e. kind of like pledging your home to the bank in order to gain access to cash). From the banks’ point of view, it is a relatively safe deal because your home is technically acting as collateral, and what’s more, they also get to earn interest from the amount you’ve overdrawn.
Why Do People Utilize the Overdraft Facilities in Their Home Loans?
There are many reasons, and here are a few common ones:
- Overdraft is a fast and convenient option to gain access to fund without having to apply for a loan.
- Overdraft allows one to unlock the equity of a not-yet-fully-paid property for various purposes, such as investing.
- For some, a home loan with overdraft facility is simply a protection mechanism that allows them to quickly access funds in case of emergencies.
Finally, Is Overdraft in a Home Loan Worth Using?
Different banks offer different terms and conditions for their home loans (and specifically, the overdraft facilities attached); therefore, there isn’t any sure-fire answer as to whether you should or should not use that overdraft facility attached to your home loan.
But as we’ve always professed, comparison is the key.
Like any other means of accessing money you don’t have from the banks, using the overdraft facility on your home loan commands fees and charges. It is to your interest to find out what they are, then compare them with those of other financial vehicles you’re currently using, such as personal loans and credit cards. When you’ve done the math, you will know for certain if it is worth your while!
Love this article? You may also wish to read about our explanation on the home loan redraw facility.
Looking for a home loan now? Check out the ones with the best rates at our home loan comparison table.
Different banks offer different terms and conditions for their home loans (and specifically, the overdraft facilities attached); therefore, there isn’t any sure-fire answer as to whether you should or should not use that overdraft facility attached to your home loan.
But as we’ve always professed, comparison is the key.
Like any other means of accessing money you don’t have from the banks, using the overdraft facility on your home loan commands fees and charges. It is to your interest to find out what they are, then compare them with those of other financial vehicles you’re currently using, such as personal loans and credit cards. When you’ve done the math, you will know for certain if it is worth your while!
Love this article? You may also wish to read about our explanation on the home loan redraw facility.
Looking for a home loan now? Check out the ones with the best rates at our home loan comparison table.
