Five Important Factors to Keep in Mind When Prepaying Your Home Loan

To purchase a residential property, Home Loans are one of the most suitable options available to a buyer. Home Loans are secured credit facilities that are offered by NBFCs, banks, and other financial institutions. Housing Loans in India can be availed of for ready-to-move-in houses, under-construction properties, renovation, and repair, among others.

The interest rates on Housing Loans vary from one lender to another. They typically have tenors that extend up to 32 years. Homebuyers can repay the dues as Equated Monthly Installments (EMIs). Lenders, notably, also offer an option to prepay the loan, meaning that a borrower pays a sum of dues on top of the EMI amount and ahead of time.

A Housing Loan is a long-term financial commitment. It often happens that the Home Loan interest component exceeds the principal Home Loan amount owing to the long tenors of a typical Housing Loan of 20 to 32 years. A Home Loan prepayment can help relieve the burden off your chest by a few years. Here are five factors to keep in mind when you decide to prepay a Home Loan:

 1. Make sure you are left with enough money for monthly expenses: When a borrower makes part payments for a Home Loan, either the loan tenor is reduced, or the EMI lowers. Based on the requirements, the borrower must diligently assess and choose between the two. A reduction in the Home Loan tenor will help save on the total Housing Loan interest payable and the reduction in the Home Loan EMI will reduce the monthly outflow and keep more disposable income at hand. Based on the life stage of a customer, either of the options may be considered.  

Additional Read: How to Calculate Home Loan EMI 

2. Save Tax and compensate for your interest: Since a Home Loan comes with tax-savings benefits, Home Loan prepayment may also impact the tax savings on the outstanding principal and the interest outgo. Hence, before deciding on prepaying, specialists ask borrowers to consult an independent tax professional to understand the tax benefits one may have to forgo to prepay a Housing Loan in India. 

3. The first few years are what you need to target: Home Loan prepayment in India, especially during the initial part of the loan tenor, is always a good idea - where the interest component is significantly high. Prepayment at a later stage might not help in maximizing the advantage of being debt-free early on. However, if you do receive a lump sum amount in the latter half of the loan tenor, then it may be prudent to invest somewhere and repay the existing Home Loan in the normal tenor. Timing plays a critical role in Home Loan prepayment.

Additional Read: How to Pick the Right Home Loan Tenor 

4. Look out for hidden charges: Individuals typically do not have to pay prepayment charges or fees toward their Home Loan procured on a floating-rate basis. However, it’s always advisable to keep an eye out for any hidden costs to avoid surprises. The borrowers need to seek the lender's assistance to be aware of the terms and conditions and clarify doubts before making any kind of prepayments. 

5. Transfer your balance to a lender who offers prepayment as a facility: As Home Loan prepayments can lower interest costs, one might also opt for an alternative, i.e., a Home Loan Balance Transfer. However, the borrower needs to check that there are reliable lenders in the market offering lower Home Loan interest rates without hidden charges or additional costs. This can help lower the interest payout without impacting investments or savings.

Home Loan Prepayment: Things to Know Before You Opt

Although Home Loan Prepayment can liberate you sooner from the shallows of debt, not everyone can be in a situation to avail of it. If you have excess money at any point in your tenor, you must think ahead and divert the money accordingly. In any case, the emergency funds that are set aside for unforeseen scenarios must be intact. It is not practical to exhaust emergency funds and then borrow costly, additional funds when unexpected needs pop up. The investments set aside for other important, long-term goals like one’s retirement planning, child’s education, or other big-ticket costs must preferably not be liquidated for prepayment of a Home Loan. The reason: Doing so could adversely impact the individual’s financial health in the long term and borrowers could be compelled to avail of additional and expensive loans to achieve financial goals. 

While Home Loan prepayment is a convenient option to close the big-ticket loan before its tenor, the exercise calls for keeping in mind some essential things. It must never be a rushed decision and taken after considering different aspects mentioned above. A housing loan prepayment calculator can assist you in determining the optimal amount and frequency of prepayments to make in order to meet your financial objectives.