Housing loans usually come with a long tenor, which can lead individuals to shell out quite a sum by way of interest payment. In an urge to save on interest outgo, most borrowers consider prepaying their loans.
This can be an effective way to reduce the debt burden in the long run. The reason is most borrowers are choosing to apply for home loan online with the current sub-7% floating rates, and lenders cannot levy prepayment charges for floating-rate loans.
However, before proceeding with such a decision, here are a few things to keep in mind.
Check the progress of loan tenor
When opting for prepayments, it is always a wise option to do so during the initial stages of repayment. This is because the interest component of EMI is highest during the early years and decreases with the progress of a tenor.
Making lump-sum prepayments when you still have a substantial tenor left can help cut down on outstanding principal. This, in turn, reduces your interest outgo for later years significantly. Conversely, making prepayments near the tenor end will not add to benefits since you may have already paid most of your interest by then.
Examine if prepayment furnishes more savings than balance transfer
Refinancing can be an excellent way to enhance savings for existing borrowers stuck with high interest rates. Before deciding to make prepayments, check if the lower home loan rates via balance transfer benefit you more than prepayments. In that case, individuals can save their investments planned for prepayment while enjoying interest savings from loan transfer at the same time.
Compare potential savings with tax benefits
Home loan borrowers can avail tax deductions on interest payment under Section 24(b) of the Income Tax Act. Those paying tax under the old regime can enjoy additional deductions on principal repayment under Section 80C. Prepaying your loan will reduce your total repayment and hence lower your tax benefits. Therefore, make prepayments only if it offers you greater savings than tax benefits.
Avoid using emergency funds
Your emergency funds are supposed to help you meet extensive financial requirements during unforeseen events like medical emergencies, unemployment, etc. Exhausting such savings against home loan prepayment can compel you to opt for new external financial help when an actual emergency arises. In order to avoid this debt cycle, strike emergency savings off your list before you choose to apply for a home loan online, especially under the current circumstances.
Never exhaust investments reserved for indispensable financial goals
Funds set aside for crucial financial purposes like retirement corpus, down payment for a car loan, your child’s higher education, etc., should never be utilised to make prepayments. These are extensive investments that take up most of your life to substantiate your ultimate financial success. Draining them can later impel you to take out more expensive loans to replenish these funds.
Consider utilising returns from existing investments
Just like exhausting other investments to prepay can lead to financial crises, defaulting on your home loan EMI can have detrimental outcomes. A middle ground here is to consider using returns from fixed income products to make prepayments. These include fixed deposits, bonds, equities etc. Most of these fixed-income assets generate returns exceeding housing loan interest by far. Therefore, utilising these amounts can be an effective way to reduce the EMI burden as predicted during the home loan online apply process.
Make a wise choice between reducing tenor or EMI
Making prepayments is one of the most effective ways to reduce home loan tenor and EMI. The dilemma lies with borrowers when choosing one between the two. Choosing to minimise repayment tenor can help individuals save on their total interest outgo. On the other hand, lowering EMIs can reduce their financial liability every month and boost disposable income. In this regard, individuals can use an home loan EMI calculator to decide which option will benefit them more.
Also, look out for other home loan offers from different lenders while comparing.
Few financial institutions bring pre-approved offers that expedite the loan application process. These offers are available on financial products like home loan, loan against property, etc. Potential borrowers can check their pre-approved loan offers by submitting name and contact details before applying.
Make sure to take note of these factors before proceeding to choose prepayments for your loan amount.