How an overdraft home loan actually saves interest
Parking money against the loan cuts the balance you are charged on — without locking the money away.
It is an overdraft, not a loan account
An overdraft home loan comes with a current account attached. Any money sitting in that account is subtracted from the balance the bank charges interest on. Park ₹5,00,000 against a ₹50.00 L loan and you are charged interest as though you owed ₹45.00 L — but the ₹5,00,000 is still yours, and you can withdraw it tomorrow.
That is the whole difference from a prepayment. A prepayment is gone: it has permanently reduced the principal and you cannot get it back without a fresh loan. Parked money buys the same interest saving for as long as it stays put, and stays liquid.
A worked ₹50.00 L example
₹50.00 L at 8.75% over 20 years, with ₹5,00,000 parked from the first month and left there. The EMI does not change — ₹44,186 either way.
Interest without parking
₹56.05 L
over 240 months
Interest with parking
₹37.68 L
over 188 months
You keep
₹18.36 L
and finish 4y 4m early
₹5,00,000 — ten percent of the loan — removes ₹18.36 L of interest and 52 months of payments. The EMI is unchanged, so every rupee of interest the parked money saves goes to principal instead, which is what pulls the payoff date forward.
Where this goes wrong
The figures above assume the money stays parked for the whole loan. It is an overdraft, so nothing stops you withdrawing it — and the moment you do, interest resumes on the higher balance. Withdraw it in year three and you keep only the interest saved up to that point.
That is the real trade-off, and it is behavioural rather than financial: a An overdraft gives you a prepayment you can undo, which is excellent if you are holding an emergency fund you were never going to spend, and a trap if the liquidity quietly becomes a car. Overdraft rates are also sometimes a little higher than the equivalent term loan, so compare the actual sanctioned rate before assuming the overdraft wins.
Is parked money better off invested?
Parking earns you a guaranteed, tax-free 8.75% — tax-free because it is interest you never pay rather than income you receive. To beat it an investment has to clear 8.75% after tax, with certainty, which is a higher bar than it first sounds. For money you need to keep liquid, the overdraft is usually the better home.