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Is Prepayment of Your Home Loan a Good Idea?

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Nobody wants to remain in debt, given a chance we all like to prepay our debts ASAP. Prepaying a home loan, however, differs significantly from prepaying other loans. A home loan has a variety of benefits that may make prepayment unappealing. You may save a few EMIs by prepayment, but you risk losing out on related tax benefits, investment benefits etc. and inevitably incur prepayment fees for your home loan.

What are the Charges for Prepayment of a Home Loan?

A home loan prepayment is when a borrower fully or substantially repays their loan before the agreed-upon tenure. Financial institutions charge a prepayment fee; it is crucial to read all loan-related documents carefully before signing. These pre-payments are dependent on the kind of interest rate and the type of consumer, i.e. Financial institutions do not impose a prepayment penalty on individual loan applicants if the interest rate is variable, but they do apply for home loans with fixed interest rates.

The fees were also assessed based on who owned the property, i.e. When it comes to non- individual vs. individual ownership, penalties are imposed on both floating and fixed interest rates in Non- individual ownership.

Benefits of Prepaying a Home Loan

  1. You Avoid Future Instances of Delayed or Failed EMI Payments
    Financial obligations increase as time passes. Prepaying a Home Loan eliminates the need to dip into savings to pay off the EMIs on it. Therefore, it’s advisable to prepay partially or completely whenever possible.
  2. It reduce the Interest Outflow
    Partial prepayment reduces the principal amount, which reduces the interest burden and future EMIs. Since the interest component in the EMI is highest during the initial stage of the Home Loan, it’s better to repay early to get maximum benefits.
  3. It reduce the Home Loan Tenure
    Customers are usually given the option of lowering their EMI or shortening the term of their home loan by financial institutions. It is up to the customer to choose which option they want to pursue.

Must Read: Home Loans Tax Benefits: How to Avail Them?

Demerits of Prepaying Home Loan

  1. No More Tax Benefits
    In addition to providing financial assistance, Home Loans can also help you save money on taxes. As per the Income Tax Act, 1961, one can apply for a tax rebate of up to Rs.1.5 lakhs on repayment of the principal amount and up to Rs.2 lakhs on interest payment. If you prepay your Home Loan, you may miss this opportunity to save on this money.
  2. Reduced Savings
    Before prepaying, ensure that you have sufficient funds set aside for other financial goals and emergencies else you may have to compromise on other goals due to lack of savings.
  3. Losing on Other Investment Opportunities
    While customers prepay the Home Loan, it losses on interest or benefit which can be earned while investing the money in available investment opportunities. In case, the expected return on investment exceeds the effective rate of interest on the mortgage, investing the surplus funds is more beneficial than prepaying the mortgage.

Conclusion

While it is beneficial to reduce debt, a strong aversion to debt is not always prudent. Remember, in your haste to prepay your home loan, don’t sacrifice liquidity. Make sure you have enough money for your emergency needs & other financial obligations.

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