Important factors to be considered before loan pre-payment:
Funding needsIt is important to ensure that you have sufficient funds for your financial and personal goals or even unforeseen circumstances like medical emergencies or loss of a job. Excess of funds should be smartly managed. So, if you decided to prepay your loan (which will be a large chunk of money), you must have enough with you to sustain yourself as well as your family in a difficult time. Income from investments
Cost of pre-payment should be compared to the returns one is clocking through investments. If you have the opportunity to earn returns which are higher than the home loan interest, then it is better to invest the surplus funds. Picture this scenario - you come by a large inheritance that could take care of your home loan amount. Should you pay off the money at once or would it be wiser to invest that money and make a much larger sum?
Tax benefitsOne of the most important benefits (and a long-lasting benefit too) is the tax relief that is available when you have an existing home loan. You are allowed complete tax exemption on the interest paid on housing loans (full interest amount is allowed as an exemption in case of a let-out property, but in case of self-occupied, the exemption is up to 2L). On full payment of a home loan, the tax benefits are higher versus that on pre-payment of loan.
Pre-payment chargesOne must always take the penalty or fee for prepayment into consideration as well. Typically, a bank or a financing institution levies a pre-payment charge which may vary from 2 – 3% of the outstanding amount. It helps to have this clarified at the starting of your home loan agreement - it would also help to apply and acquire a loan from an institution that does not charge a prepayment fee.
Stage of loanPrepayment largely helps in reducing the interest outgo. The interest is usually the highest during the initial tenure of the loan repayment, hence pre-payment of the loan seems plausible only in the initial years of the tenure. If you've finished 20 years of a 25-year home loan tenure, you must consult with a financial expert before paying off your debt at once.
Interest RateIt is worth noting that, the interest rate on home loans is lower than the rate of interest charged for other loans, like personal, education or even credit card loan. Therefore, it is recommended to pay off other high interest-bearing loans, if any, on priority. Remember, the other loans might be of small amounts in comparison to a home loan - but their rate of interest is a lot higher.
A decision of pre-payment should be thought through, keeping in mind stage of life, liquidity, financial and emergency requirements while taking the above factors into consideration. Know more about home loans (link)
Learn more about your Home Loan Eligibility here.
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.
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