Should You Prepay Your Home Loan?

Majority of buyers fund their home purchase through a loan and have the liability to pay an EMI (equated monthly installment) for a long period of time. This is the reason why buyers want to prepay the loan so that they can plan another investment during their earning cycle. The Reserve Bank of India (RBI) in 2012 directed banks to stop levying foreclosure charges and pre-payment penalties if home loans are availed of on a floating rate of interest. It light of that, it makes more sense to prepay your loan.

Why prepaying is a wise option?

Considering a large share of total amount repaid by the buyer to the bank is interest component, prepaying the loan can help him save a huge chunk of his saving which he is paying as monthly installments. Suppose Mr X borrowed Rs 50 lakh from a bank at an interest rate of 9.5 per cent for the tenure of 20 years. The total interest payable to the bank by Mr X would be approximately Rs 61 lakh while the principal remains the same. At the end of the tenure, Mr X will end up paying Rs 1.11 crore for a loan of Rs 50 lakh.

In such cases, repayment of the home loan would make sense, depending upon the foreclosing amount, the number of installments already paid and levied rate of interest. In case the loan is taken at a fixed rate of interest, the bank would charge a prepayment fee.

Lesser-Known Tax Benefits Home Loan Borrowers Are Entitled To

Should you consider prepaying home loan?

There many ifs and buts when it comes to home loan prepayment. A buyer can get rid of the liability of paying monthly installments after prepaying his loan but also consider the fact that exhausting the entire liquidity to pay off the home loan may not be a wise idea.

Home loan interest rates are lowest as compared to other loans. Hence consider paying off other loans at first.

If you have received a lump-sum amount from any source, you can consider reinvesting it in those channels where returns are higher than the total interest being paid.

Factor in the emergency situations and consider keeping in the contingency fund.

The Income Tax Department keeps a vigil on repayments of home loans. Hence, you should be ready to reveal the source of funds, if asked.

Here are certain facts you should know about home-loan repayment:

Prepayment can be beneficial if done at the right interval of time. This varies as per loan amount. For instance, for the higher loan amount, part prepayment after three years can be beneficial while for a smaller amount, payment can be done after one year as well.

Loan prepayment impacts your credit worthiness. So, as soon as you have done the payment, ask your bank to make the changes in your CIBIL Database.

At times, banks can ask for the source of funds when you are repaying the amount. Therefore, keep six months bank statements handy from which you are making the payment.

Tax implications

A homebuyer can claim the tax benefit only if the part prepayment amount is equivalent to interest deduction under Section 80 (C) which is Rs 1.5 lakh in case of second property or Section 24 which is Rs 2 lakh in case of self-owned property. Apart from this, loan processing fees,prepayment  penalty is also deductible from income tax.