When you avail of a home loan, a question that often comes to mind is: how quickly one can repay the loan? It is an obvious one because we endeavour
to reduce or eliminate the debt burden.
But before you rush into prepaying, here are a few things to look into:
- What is the rate of interest you are currently paying?
- What is the remaining tenure -months or years before the home loan tenure ends
- Will it effectively result in saving money for you?
- How would it impact your tax planning?
- And the potential return you could clock as result of investing the money saved
Let’s discuss each of the above in detail:
- The rate of interest – Assess the rate of interest you are currently paying on the home loan. It ought to be relatively competitive and should not stress you financially. If you can save on interest outgo, prepaying the home loan could be a prudent idea. After all, a penny saved is a penny earned! But if the rate is competitive, prepaying and foreclosing the loan would not make sense.
- The remaining tenure of your home – The longer the tenure of your home loan, higher the interest that you will defray. Hence, if there’s substantial time before the home loan tenure officially ends, then, prepaying the loan by opting for a home loan transfer could be worthwhile. But if that’s not the case and there are just a few months to a year left before the home loan tenure ends, this could prove to be meaningless.
- Return on investment potential as a result of savings – If you have the opportunity to earn a higher return than the interest on the home loan, prepayment would prove beneficial. But you also ought to weigh the investment opportunities sensibly, whereby you yield higher post-tax returns.
- Impact on tax planning – If you are considering prepaying your home loan in full, gauge the tax benefit you would lose as a result. As you may know, the principal portion of the home loan EMI is eligible for a deduction under Section 80C of the Income-tax Act, 1961, subject to a maximum limit of Rs 1.50 lakh. Moreover, the interest on the home loan is eligible for a deduction under Section 24(b) of the Act - for a Self-Occupied Property, upto Rs 2.00 lakh per annum, while in the case of a Let Out Property/s (LOP) it is not subject to any maximum limit.
In addition to the above, do consider the home loan prepayment charges. While there isn’t a prepayment charge on a floating rate loan; for a fixed rate home loan, there are pre-payment charges which vary across lenders. Also, before prepaying your home loan, do assess the impact it would have on your other intermediate financial goals viz. children's education needs, their expenses, etc.
Hence, you need to think through all the aforesaid factors very carefully, although home loan is a big liability. The benefit should outweigh the cost of home loan repayment.
And finally when you decide to prepay the home loan—partially or fully, write to the lender/bank. If you decide to pre-close the home loan in entirety, do not forget to collect all your important documents back from the lender/bank and take a No Objection Certificate (NOC) claiming no dues are pending from you, the borrower.
[Read: Home Loan Balance Transfer – All You Need To Know]
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.