The easy availability of Home Loans has made it possible for numerous people to afford their dream homes in India. The housing finance market stood at approximately Rs. 24 Lakh Crore in the third quarter of 2022 and is expected to double in the coming five years.
A Home Loan is a long-term financial commitment suitable for many to purchase a house. This loan tenure lasts up to 20 years. It is possible that during the loan’s tenure, one may have a cash inflow and may want to prepay the Home Loan in part or in full. Prepaying a Home Loan helps one reduce the interest payment on the loan and helps one become debt-free sooner. One must deliberate on a few factors before considering Home Loan prepayment.
Factors to Consider Before Home Loan Prepayment
- Other financial requirements: Prepaying the Home Loan helps save on the interest outgo. However, spending one’s entire savings prepaying the Housing Loan is not advisable. Have a provision for sudden financial requirements, like a medical emergency or urgent fund requirement for business. Before opting for Home Loan prepayment, ensure enough funds for immediate financial goals and unexpected expenses. If one exhausts the funds available to repay the Housing Loan, they may have to take a loan at a higher interest rate to meet unforeseen expenses. So use only surplus funds to prepay the Home Loan.
- The borrower’s age: The age of the Home Loan borrower is another crucial factor to consider before prepaying a Home Loan. Post-retirement, it may get difficult to handle Home Loan EMIs (Equated Monthly Instalments). An EMI calculator for LAP (loan against property) can help foresee the monthly payable amount and judge whether one can manage the payments after retirement. It is best for a person nearing retirement to repay any existing debts to avoid excessive financial burden post-retirement.
- Stage of the loan: As stated earlier, a Home Loan can have a long life. The stage at which the property loan stands decides how beneficial it is to repay it. The interest component of a Home Loan repayment is maximum in the early stages of the loan. In the later stages, the interest component reduces. Prepaying the Home Loan in its early stages can help one save substantially on the interest payment. However, prepaying the Home Loan at a later stage may be less beneficial. One may only prepay the Home Loan later if they want to increase their eligibility to apply for another loan.
- Tax benefits of housing finance: The Government of India provides tax benefits to Home Loan customers. Under Section 80C, a Home Loan borrower can claim a tax exemption of up to Rs. 1.5 Lakh every financial year. This benefit is available as per the Income Tax Act 1961 on the repayment of the principal amount of the Home Loan. And under Section 24(b), one can get tax exemption of up to Rs. 2 Lakh on the interest paid on a Home Loan taken for a self-occupied house. If one prepays the entire Home Loan amount, they will not be eligible for tax benefits. Therefore, consider these tax benefits before prepaying a Home Loan.
- Reflection of the prepayment in the credit history: Prepaying a Home Loan reflects positively on one’s financial position. Prepaying a debt shows that one is financially stable and capable of handling their existing financial commitments. One must ensure that a Home Loan repayment gets documented in the credit history. Check the individual’s creditworthiness through home loan repayment calculator and helps gain further access to credit in the future. Request a CIBIL report once every three months to keep track of the updates on the credit score.
- The choice between loan tenure and EMI reduction: A Home Loan borrower can choose between reducing the loan tenure and the EMI. To wrap up the loan soon, opt for a reduction in the loan duration. On the other hand, if the monthly EMIs are a burden, get the EMIs reduced to ease monthly financial responsibility.
Home Loan prepayment can reduce the loan duration and the interest liability on a Home Loan. With reputed banks, one can avail of a Home Loan starting at only 8.65% per annum.
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