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Understanding a Loan Against Property and an Overdraft

Mortgage loan and mortgage overdraft differ in quite a number of ways and serve different financial goals. The pros and cons of each are generally the cause of confusion and you may have been in a situation where you’ve wondered which of the two is the better choice. To help address this doubt and provide greater insight on this subject, take a look at these pointers.

What is a Mortgage Loan?

A mortgage loan is simply a term loan that the borrower must pay back to the lender over a fixed tenor. With this instrument, borrowers must pledge a self-owned property as collateral to avail funding. Depending on the value of the collateral and the financial profile of the applicant, lenders sanction a loan amount and the interest rate applicable for the tenor.

What is an Overdraft?

An overdraft loan is a facility or feature of the primary offering. In this case, it is the mortgage overdraft facility and differs slightly from the traditional offering with respect to its disbursal and repayment. With this feature, the loan amount isn’t directly disbursed to your bank account; rather, it is available to you through a loan account. Additionally, interest isn’t charged on the entire sum you qualify for.

What are the Differences Between a Mortgage Loan and Overdraft?

There are several key differences between a mortgage OD and the traditional offering. These include variations in the repayment window, usage and the interest charged. For a more detailed breakdown, read on.

Mortgage loan Mortgage loan overdraft
The entire sanction gets disbursed to your bank account. This is ideal for one-time purchases or expenses. Some common expenditures include funding business expansions, purchasing new machinery, upgrading infrastructure, renovating a home, or paying for emergencies. The approved sanction is available to you through a loan account. This allows you to borrow as needed without having the entire sanction disbursed to you in one lump sum. Such a provision is ideal for those whose expenses are unpredictable. It acts as a financial safety net that can be accessed at any time.
Some of the best ways to use this feature include meeting short-term cash flow needs, maintaining optimal working capital, and addressing operational costs.
Repaying this loan happens over a fixed tenor and through monthly payments, or EMIs You have the option to repay what you owe whenever you have excess funds on hand. Additionally, the overdraft gets renewed on a yearly basis. There may be instances where a lender may refuse to renew the overdraft until the outstanding amount is repaid.
Interest gets charged on the entire sanction, right from the day of disbursal. Interest rates are also generally low. Interest is only charged on the amount you withdraw and not the sanction. Interest rates are generally higher than the traditional offering.

 

Understanding these differences should address any doubts and help you make the right decision when picking between the two.