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

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6 min 17 Jan 2023

Important Factors for Prepaying Your Home Loan

Highlights:

About Home Loan Prepayment
Factors to Consider while 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. In India, housing loans can be availed of for ready-to-move-in houses and under-construction properties.

The interest rates on housing loans vary from one lender to another. They typically have tenures that extend up to 32 years. Homebuyers can repay the dues through Equated Monthly Instalments (EMIs). A housing loan is a long-term financial commitment and it often happens that the Home Loan interest component exceeds the principal Home Loan amount owing to the long tenures. Some lenders also offer an option to prepay the loan, allowing borrowers to pay off a portion of the remaining Home Loan balance in addition to their regular EMI payment.

Factors to Keep in Mind while Prepaying a Home Loan

A Home Loan prepayment can help you reduce EMIs or tenure, thereby helping you become debt-free easily. Here are five factors to keep in mind when you decide to prepay a Home Loan:

1. Make sure you are left with enough disposable income for monthly expenses: When a borrower makes part payments for a Home Loan, either the loan tenure is reduced or the EMI. A reduction in the Home Loan tenure 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 requirements, the borrower should diligently assess and choose between the two.

Additional Read: How to Calculate Home Loan EMI

2. Understand the implication of prepaying on tax benefits: Since a Home Loan comes with tax-saving benefits, Home Loan prepayment may also impact the tax savings on the outstanding principal and the interest outgo. Hence, before deciding on prepaying, borrowers should understand the tax benefits one may have to forgo to prepay a housing loan.

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

Additional Read: How to Pick the Right Home Loan Tenure

4. Look out for hidden charges: Individual borrowers do not have to pay prepayment charges or fees toward their Home Loan procured on a floating-rate basis. However, for fixed rate Home Loans, prepayment charges apply if payment is not made from 'Own Sources'.

Note: 'Own Sources' refers to any source other than borrowing from a bank/NBFC/HFC and/or a financial institution.

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, it is advisable to opt for it after careful deliberations. If you have excess funds at any point in your tenure, you must think ahead and divert them 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 because doing so can 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 tenure, the exercise calls for keeping in mind some essential 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.

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