For most of us, a home loan is a means to fulfil our dream of owning a home. But a home loan is quite an expensive affair and binds us for 10–15 years. In this prolonged time span, a borrower can save a good amount to reduce the burden of the loan. If you have enough savings and want to pay off your debt as early as possible, you need to go the prepayment way. But you should also keep in mind that lenders charge a certain fee as prepayment penalty. If you are a borrower, you should read on to know what a prepayment is and what pros and cons it has.
What is a Home Loan Prepayment?
Prepaying means paying above the fixed EMI amount of an outstanding loan amount. A prepayment can be for the whole due amount of a loan. Also, a partial settlement of debt can be made before the due date, like 3 or 4 EMIs at a time.
Let’s consider an example to clear the picture. You pay an EMI of Rs.15,000 for a home loan of Rs.20 lakh, with a tenor of 15 years. Now, you have saved a handsome amount or got a good bonus. You may prepay some of the loan amount with the extra amount in hand. For that, you can utilize the online home loan prepayment calculator to get a fair idea. This will reduce the burden of the loan.
Things to Consider before Prepaying your Home Loan
- Check your current financial scenario. Do you have enough money to make a prepayment?
- Calculate how much money you need at present or in the near future before going for the prepayment.
- Have a look at the current home loan rates if your loan has a floating interest rate. Will they rise, fall, or remain the same? Will it become beneficial if you prepay? Ask yourself these questions first.
- Check if there is an alternative investment option that will give you a better return.
- If you have multiple loans, begin by prepaying the one with the highest rate of interest.
Should I Go for Reducing EMI or a Prepayment?
Here’s another example to consider. You have got a bonus of Rs.2 lakh and plan to make a prepayment of home loan with the amount. Now, if the tenor remains unchanged, the home loan EMI amount will decrease. On the contrary, the EMI will remain the same if the tenor is reduced. So, when it comes to prepaying your home loan, think about what the better approach would be—reducing the EMI or the tenor.
But if you choose to prepay, you will be able to save on interest expenditure and to reduce the outstanding principal amount. This will also have a positive impact on your credit history.
Disadvantages of Home Loan Prepayment
- There is no tax benefit if you prepay your housing loan. But with your regular EMIs, you get tax savings.
- By prepaying your house loan, you let go of a substantial amount. You could have invested this amount elsewhere.
You need to furnish some documents to prepay the loan. These include everything you provided while applying for the loan. A government ID proof is mandatory. Keep a bank statement handy that reflects your EMI payment history.
A home loan prepayment has both advantages and disadvantages. Therefore, consider all the points before you decide to prepay your home loan. Nowadays, non-banking financial companies (NBFCs) offer a home loan amount up to Rs.5 crore with a tenor up to 20 years. So, owning an apartment in your dream complex is no big deal now. Just check your eligibility and the home loan rates.