A home loan prepayment is one of the finest ways to save on the total interest outgo. It allows you to pay off your loan before the predetermined repayment tenure, thereby bringing down the overall cost of borrowing. While it’s true that pre-closing your loan can help save a substantial amount of money, you must analyse all the prepayment related aspects before going ahead with it. Mentioned below are a few things that you must take into consideration before pre-closing your home loan.
- Check your finances
- Depending upon your financial capacity, you can either opt for a part-prepayment or full prepayment. While a full prepayment of a housing loan will make you debt-free, a part-prepayment will reduce the outstanding loan amount and lessen the repayment burden.
- Regardless of whether you opt for a part or full prepayment, you must evaluate your finances beforehand. You must list out your long-term and short-term financial expenses such as children’s higher education, wedding-related costs, medical emergency funds, etc. It’s advisable to opt for a prepayment only if you have enough savings for other financial responsibilities.
- Moreover, if you prepay your loan without having sufficient funds, you may end up sacrificing your lifestyle and basic needs.
- Time your home loan prepayment
- If you have already serviced a major portion of your home loan tenure, opting for prepayment wouldn’t be a wise choice. Lenders usually levy prepayment charges to recover the interest lost due to loan prepayment. Thus, if you pre-close your housing loan at a later stage, the prepayment charges may offset the amount saved on the total interest outgo of the loan.
- You can consider making use of a home loan prepayment calculator to calculate the amount you would save by pre-closing your loan. It’s advisable to pre-close your loan only if the amount saved is high.
- Also, you must apply for a home loan with a lender that has minimal prepayment charges. This will be extremely beneficial if you opt to pre-close your loan.
- Weigh the tax benefits before pre-closing your loan
Under Section 24 of the Income Tax Act, 1961, you can claim a deduction of up to Rs 2 lakhs on the interest portion of your home loan EMI. Additionally, under Section 80 C of the Income Tax Act, 1961, a deduction of Rs 1.5 lakh can be claimed on the principal repayment. Pre-closing the loan ahead of its tenure would mean letting go of these deductions. Thus, you must weigh the tax benefits on home loans in India before pre-closing your loan.
- Judge whether to invest or pre-close
You can utilize the surplus funds to either pre-close your home loan or to make lucrative investments. By investing wisely, the returns obtained can be much higher than the amount you would save by pre-closing your loan. However, if the interest obligations weigh more than your estimated investment earnings, it would be ideal to pre-close your loan.
More often than not, pre-closing the home loan may seem like the finest idea as you will be able to free yourself from a long-term obligation. However, by keeping the above-mentioned factors in mind, you will be able to utilize your surplus funds in the best possible way.