Pre-payment of home loans may seem like the most natural choice when one gets their hands on some additional funds. After all, who doesn’t like to get rid of financial liabilities as soon as possible?
However, before you rush to your lender, there are some home loan prepayment rules that you should be aware of so that you can take an informed decision. There are also some other considerations to make to avail the maximum benefits out of it.
Home Loan Prepayment: Why or Why Not?
Most home loans come with a long tenor of up to 20 years. The average loan repayment period in India is 12 years. Home loan prepayment is nothing but settling your loan, either entirely or in part, before the due date.
Prepayment can be beneficial for a variety of reasons – to cut down EMIs, lowering the interest rates, settling the debt early and thus, saving money on total interest paid.
Of all the reasons mentioned above, none is more beneficial to a borrower than the reduced EMI and tenor, and savings on the interest payable. Depending on how much you wish to prepay, your loan EMI and tenor will be reduced by a substantial extent, often by half. You may calculate the exact reduction in tenor and EMI’s using a home loan prepayment calculator.
Every financial institution offers a prepayment facility subject to specific rules and regulations. Some of them levy a prepayment charge, which may range between 1% and 3% of the outstanding loan amount. You may also be asked to provide additional documentation such as ITR filing and salary slips.
Recently, the Reserve Bank of India issued a circular which forbids banks from collecting prepayment charges on floating interest rate home loans. It is another reason why floating interest rate home loans are increasingly gaining popularity in India.
Despite these glaring advantages, there may be certain circumstances when prepayment of home loans may not be the best option. It is especially true when your monthly EMI is not a massive financial burden on you. The reason is that you can avail substantial tax benefits on home loan repayments under section 24b and 80C of the IT Act, 1961. You may avail tax deductions of Rs. 2 Lakh and Rs. 1.5 Lakh on interest and principal payments, respectively. There is an additional tax deduction of Rs. 50,000 for first-time home buyers on interests paid under section 80EE.
Things To Consider
Prepay as early in the tenor as possible. It reduces the total interest payable. Prepaying at later stages mostly mitigates the principal amount, which may not be financially beneficial for you.
Calculate everything carefully using a home loan prepayment calculator.
When given a choice to reduce the EMI or tenor after prepayment, it’s advisable to opt for a reduced tenor.
Evaluate the tax benefits before prepaying. If you are prepaying at the last stages of your loan tenor, the tax benefits may exceed the interest payable.
Prepaying your home loan may be a massive weight off your shoulders but consider all aspects carefully before doing so. Calculate the most beneficial scenario for you from the financial perspective by considering the total interest payable and tax benefits on your home loan as well.