Home Loan Prepayment – Yay or Nay?
As soon as we move towards being financially independent, some of us are conditioned to maintain a surplus of savings. We resort to loans only when times are difficult and the savings are not sufficient. People are averse to debt since it is believed to be a sign of being financially unstable. Due to this, when people acquire any surplus amount, they tend to use it to prepay loans at times. Though this is appropriate for personal loan or vehicle loan, a home loan can actually be beneficial in the long-run without prepayment. Read on.
Contrary to how other loan products function, a home loan is a profitable proposition without pre-payments before the end of loan tenor. Home loan offers a number of benefits amongst which the most important one is tax benefit on the EMI for the borrower. From the borrower’s perspective, a home loan is a long-standing credit commitment that attracts high interest, which is why people prefer to prepay it to save on the interest to be paid out.
Since home loan pre-payment has its pros and cons at the same time, this ends up with the house divided on the topic of pre-payment of Home Loans. Let’s first consider a few points to think over when planning to prepay a home loan. Here they are:
Critical Things to Consider While Going for Housing Loan Prepayment
- Your Financial Goals
As stated above, when you prepay a home loan, owing to its bigger loan amount, you end up saving substantially on the interest saved. Though it will save you the interest amount on one side, it will also exhaust your liquid funds or savings that could have otherwise been proportioned towards meeting any immediate financial goals or even a medical emergency.
Having said that, it is extremely important that you set aside adequate funds to meet your financial liabilities before utilizing a huge amount on home loan prepayment. This will help you deal better with any financial exigencies, medical costs arising out of emergency, or even managing day-to-day expenses.
- Borrower’s Age
Borrower’s age is another important factor to consider while going for home loan prepayment. If you’ve availed a home loan and you’re nearing retirement, it is better you go for home loan prepayment, as after retirement, it may get challenging for you to shell out home loan EMI.
Also, with increasing age, there is a rise in the medical expenses and even the medical costs arising out of emergency treatments. This may leave you in a helpless situation while coaxing you to default on home loan EMI. To avert this situation, it is better to complete your home loan with a prepayment before your retirement.
- Phase of the Loan Journey
Whether or not you should go for home loan prepayment also depends on what stage you are on in your home loan journey. Since the primary benefit a home loan prepayment offers is substantial savings on the interest, how much you’ll be able to save on the interest depends on the stage of your home loan.
We all know that EMI during the initial stages of home loan is composed more of the interest payment than the principal amount. Hence, if you’re planning to prepay your home loan in the later years, you may not be able to save much towards the interest. Therefore, parting with your surplus liquid funds in such cases is not a practical decision unless you want to foreclose the loan to apply for another home loan or want to increase your home loan eligibility.
- Slash Home Loan Tenor
When you decide to partly prepay a home loan, you’re faced with two options – you can either slash the home loan EMI or the loan tenor. Although reducing the home loan tenor helps you save more on the interest payout in the long run, the decision of what to reduce depends majorly on your disposable income. Make sure you do your math well before deciding on whether to slash the home loan EMI or the loan tenor.
- Home Loan Tax Benefit
Government of India offers various tax benefits on home loan to encourage more and more people to invest in real estate sector. As per the Section 80C and 24(b) of the Income Tax Act 1961, you can claim a tax rebate of up to 1.5 lakh per annum towards the repayment of the principal amount on home loan and up to 2 lakh per annum towards the interest repayment on home loan.
Complete repayment of your home loan will prevent you from availing such tax benefits making your income more susceptible to tax deduction. Therefore, it is important to give this fact due consideration before deciding on the prepayment of home loan.
- Prepayment Penalty
Following the Reserve Bank of India (RBI)’s guidelines, lenders and banks can’t charge prepayment penalty on the home loan taken at floating interest rates. However, there are prepayment charges levied in cases where a home loan is taken at fixed rate of interest. Lenders and banks usually charge a penalty of 2% on the amount being prepaid. Therefore, it is important to consider the point of prepayment charges when deciding to foreclose the home loan.
Prepayment of your home loan may certainly be an important decision for many but doing so by redeeming your surplus liquid funds and existing savings may affect your financial health negatively. Instead of parting away with your liquid funds for home loan prepayment, you can utilize such amount for investment in fixed deposits or other profitable ventures. Even if you have made up your mind to prepay your home loan, you should do so with the amount not apportioned for a financial goal.
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