Factors to Consider Before Prepayment of Home Loan

Taking on a loan to purchase property can be seen as a double-edged sword. While it helps increase your assets, it also adds to your liabilities. Ironically, all borrowers are averse to being in debt. Therefore, whenever equipped with surplus money, the first instinct of a borrower is usually to prepay a loan. Prepayment can be made for a part of the loan or the entire home loan. However, since a home loan provides many tax benefits , it is essential to consider certain factors before deciding to prepay the loan.

1. As per the Income Tax Act, under Section 80C, you can claim up to ₹1.5 lakhs as tax deduction annually. This amount is restricted to the interest being paid in case the property is let out on rent. There is also a high chance that the government may increase the incentive on home loans in the future. However, in the case of full prepayment, you shall no longer be able to enjoy tax deductions, and if you opt for partial prepayment, the tax benefits may reduce considerably.The interest rate on home loans is usually lower in comparison to personal loans or the interest charged on credit cards . For this very reason, it is vital to prioritize which loans should be paid back first. Ideally, you should try to pay off other high-interest debts on priority.Prepayment of home loans reduces the interest being charged on the principal amount. Since the outflow of interest is higher during the initial years of the loan tenure, the prepayment should be made in the first few years itself. If the prepayment is made in the later stages, you may lose out on the benefits.The lender may levy a charge of up to 2 per cent of the amount of prepayment in the case of fixed home loans. These charges are levied by the loan provider to safeguard themselves from the loss of interest in case of prepayment.In a rush to prepay your home loan, you may tend to overlook the fact that the surplus funds you have can be used for other things such as a medical emergency, wedding expenses, etc. Instead of prepaying the loan, you can save the surplus funds and use them to cover the costs of your other financial goals and emergencies. You can also invest the money for better returns.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.