The OD rate may be higher
An OD loan lets spare cash reduce the balance charged interest. If it comes with a higher rate than a regular loan, that saving has a hurdle to clear. The useful question is how much money you can leave in the account through the year, after bills and withdrawals. Compare the two written offers using the same outstanding loan and remaining term.
SBI's official booklet identifies Maxgain as an overdraft home loan, while Bank of Baroda describes Max Savings using a linked account offset. Read the SBI booklet and Bank of Baroda product page for their respective structures. The rates below are illustrative, not current quotations from either bank. Use your own offer for pricing, eligibility and withdrawal terms.
Why a ₹90,000 offset saves only ₹63,000
Suppose the borrowing balance stays at ₹50 lakh for one year. A regular loan is assumed to cost 8.5%, and an OD loan 9%. Assume average eligible surplus of ₹10 lakh throughout that year and an additional OD fee of ₹2,000. To isolate the decision, ignore amortisation, rate changes and opportunity cost. Under these assumptions, regular interest is ₹50,00,000 × 8.5% = ₹4,25,000.
The OD interest base is ₹50 lakh − ₹10 lakh = ₹40 lakh. At 9%, interest is ₹3,60,000; adding the extra fee gives ₹3,62,000. The modelled annual difference is therefore ₹63,000 in favour of OD. It would be misleading to call the full ₹90,000 offset on ₹10 lakh the net benefit: ₹25,000 is consumed by the higher rate on the original ₹50 lakh, and ₹2,000 by the assumed fee.
The break-even: ₹3 lakh of average surplus
Let P be the comparison balance, rO the OD annual rate, rR the regular annual rate, S the average eligible surplus and F the extra annual OD cost. Use rates as decimals. The simplified OD advantage is S × rO − P × (rO − rR) − F. Set that expression to zero and the break-even surplus is [P × (rO − rR) + F] ÷ rO.
For this example, [₹50,00,000 × 0.005 + ₹2,000] ÷ 0.09 = ₹3,00,000. An average eligible surplus below ₹3 lakh would not cover the assumed premium and fee. An average ₹2 lakh gives ₹18,000 offset but ₹27,000 additional cost, leaving OD ₹9,000 more expensive in this simplified year. At exactly ₹3 lakh the two borrowing costs match; the example says nothing about other possible uses of that cash.
Your salary credit is not your average balance
A salary credit does not remain untouched for a year. Estimate daily surplus after bills, scheduled transfers and known expenses. Add each day's eligible balance and divide by the days in your comparison period. If ₹10 lakh stays only half the year and nothing remains for the rest, the annual average is roughly ₹5 lakh, not ₹10 lakh. Use the lender's rules for what qualifies and when a transaction begins affecting interest.
Real loans also amortise: principal payments change the comparison balance, and drawing power or eligibility can change the available offset. Floating rates may reset on different dates or use different spreads. For a closer estimate, list each offer’s balance and rate by day or month, with fees on their due dates. The annual formula helps you decide whether to investigate further; it does not predict savings over the whole loan or an investment return.
What the annual formula leaves out
List processing and conversion charges, recurring account costs and any conditions required to obtain the quoted spread. Distinguish extra OD costs from fees both offers share. A one-time additional ₹12,000 fee should not be quietly treated as a recurring ₹12,000 fee, or omitted entirely: show it in the first year and compare the likely holding period. If it is financed, account for the extra borrowing and interest too.
Parking cash also has an opportunity cost. Money used as surplus might otherwise remain in another accessible account or serve a planned purchase. Compare alternatives only on a consistent basis after relevant charges and individual tax treatment; do not assume the loan's nominal rate is a guaranteed investment return. Access to cash may matter even when the costs are close. Check the withdrawal terms before assigning value to that access.
Put the two quotations side by side
- Use the same outstanding amount and remaining term for both quotations.
- Record quoted rates and reset terms rather than an advertised starting rate.
- Estimate conservative average eligible surplus, including periods with none.
- Include all incremental upfront and recurring costs over your intended holding period.
- Stress-test smaller surplus, withdrawals for emergencies and a changed rate premium.
- Confirm access, construction-stage restrictions and how permanent prepayment differs from parking funds.
Try removing the amount you might need for an emergency or a planned purchase. If that reverses the result, the OD advantage depends on money you may not be able to leave there. Recheck with actual statements after opening. A regular loan with occasional prepayments may suit a household that values simplicity; an OD account may suit one that needs access to temporary surplus.
Common questions
Is the OD offset the same as a 9% return?
No. The example offsets loan interest; the net comparison must deduct any rate premium and incremental fees. It also leaves opportunity cost and individual tax treatment to a separate comparison.
Which balance belongs in the formula?
Use the average eligible surplus over the comparison period, not the highest credit or the original sanctioned limit.
Does the break-even formula predict the full loan?
No. It holds the balance and rates fixed for an annual illustration. Repayments, withdrawals, rate resets and changing eligibility require a timeline.
What if I use all surplus in an emergency?
The offset falls and borrowing interest increases. Recalculate with a lower balance and confirm that the funds can actually be withdrawn under the account terms.
Sources & further reading
Educational guidance, not a personal recommendation. Primary sources are linked. Articles are prepared with AI assistance. How we prepare and maintain guides.
