Your guide to a home loan prepayment

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   Borrowers can opt for prepayment of home loan when they have surplus funds, thus saving interest paid under monthly instalments. However, experts caution against overstretching oneself.

   Monetary easing does not seem possible in the near future – is what experts who are closely monitoring the actions of the Reserve Bank of India (RBI) predict. Also, it seems that we are slowly moving towards a rising interest rate cycle. So given the current circumstances, would prepaying one’s home loan prove beneficial for the borrowers? If a home-owner has surplus funds should s/he pour all the money in prepaying his/her loan and get rid of his/her debt? Let’s get these questions decoded from the experts.

What is prepayment of home loan?

   “When an individual opts for a home loan, the tenure for the repayment in the form of EMIs ranges from 10 to 30 years; hence, prepayment of the home loan means that the borrower pays an amount far greater than the EMI, thereby reducing the principal amount,” says Rituraj Verma, Partner, Nisus Finance.

Make an informed decision

   According to Harshil Mehta, JMD and CEO, DHFL, one must consider the following factors before deciding to prepay one’s home loan:

Prepayment charges:

   RBI/NHB have waived off prepayment penalty, foreclosure charges and exit fees for individual borrowers. But there is a penalty if a loan is sanctioned on ‘fixed-rate’ basis.

   Immediate funding needs: It is advisable to be apprised of any immediate funding needs in terms of emergencies or financial goals to be met before opting for a home loan prepayment.

   The stage of the home loan: The interest component in the EMI is highest during the initial stage of the home loan and hence one should prepay their home loan during these stages. Prepayment of loans in the mid-to-late stage may not give the full benefit of saving on interest.

   Return on Investment (ROI) vs cost of home loan: When surplus funds are available, a borrower may not be able to decide between prepaying the home loan to save on interest or to invest the funds in another financial instrument. In this case, it is important to compare the cost of prepayment with returns earned from investments. If the returns earned are higher than the home loan interest, then it is better to invest the surplus funds rather than using the same to prepay your home loan.

Are there any taxation benefits?

   The beauty of a home loan is the tax benefits you get year-on-year till it is paid off in full. “While a maximum tax deduction of up to Rs 1.5 lakh is allowed on principal repayment under Section 80, the tax deduction on interest goes up to Rs 2 lakh under Section 24 of the Income Tax Act. By prepaying the loan, you would no longer avail the benefits,” adds Rishi Mehra, CEO, Wishfin.

Is it a wise decision to prepay one’s home loan?

   Indians particularly are very uncomfortable w.r.t servicing liabilities for a very long time and hence prefer to clear off their debt as soon as they can. However, prepaying a home loan is a strategic decision and should be taken accordingly. “If 30 percent of one’s net income goes towards home loan repayment, then an individual should stick to the formula. However, if the EMI is much higher then prepayment is a good option,” mentions Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

   On the other hand, Mehta adds, “At times, investing that ‘extra’ income in other financial instruments can be a better option as it may yield you better returns. Alternately, the earlier you make a prepayment, the more interest you get to save. Hence, one should take the decision of prepaying the home loan after understanding the funds required in the near future for any purpose.”

Benefits of prepayment of home loan:

   When one opts for prepayment, it decreases the balance loan amount, hence reducing the EMI amount and the loan tenure;

   You can be free from longer loan repayment tenure by opting for prepayment.

Drawbacks of prepayment of home loan:

   Tax deductions, which normally happen in a home loan, will get withdrawn as soon as prepayment is made;

   In order to prepay the home loan, an individual may exhaust all his savings or retirement funds that may be required in case of a medical emergency or an exigency.

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source: The Times of India

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