Home / Money / Personal Finance /  10 points to keep in mind before prepaying home loans

To buy a residential property, home loans are one of the best solutions available for a home buyer. Home loans are secured loans that are offered by banks, NBFCs, and other financial institutions. Home loans can be availed for ready-to-move-in houses, under-construction property, repairing, and renovation among others. However, the interest rates on home loans vary from lender to lender. They generally have tenure from 10 years to 30 years. Home buyers can repay their dues as Equated Monthly Installments (EMIs). Notably, lenders also offer the option of prepayment which means a borrower pays a sum of their dues above the EMI amount ahead of the scheduled time.

By prepaying home loans, borrowers can save a substantial amount of the interest outgo and ease their financial burden.

Here is a list of key points that need to be remembered before prepaying your home loan.

According to Nalin Jain, Chief Customer Officer, and Head, of Operations at Godrej Capital, the following are the factors that need to be kept in mind:

A home loan is a long-term financial commitment and often, the interest component exceeds the principal amount due to the long tenures of a typical home loan of 20 to 30 years.

2. With pre-payment, a home loan borrower can opt either to reduce the EMI amount or the loan tenure. By reducing the loan tenure, the borrower keeps the EMI amount the same however the principal portion in the EMI increases, thus prepaying the overall loan even faster. By reducing EMI, a customer can enjoy more disposable income at hand. Depending on the life stage of the customer, either of the options can be chosen.

3. Since a home loan has tax-savings benefits, prepayment might impact the tax savings on the outstanding principal and the interest outgo. Therefore, before prepaying, it is advised that a borrower consults an independent tax professional to understand the tax benefits one might have to forgo to prepay a home loan.

4. Further, it is best to opt for the home loan prepayment option during the initial tenure of the loan when the interest component is high. Opting for prepayment at a later stage may not help maximize the benefit of being debt-free early. Thus, timing plays a crucial role in prepayment.

5. Lastly, while home prepayment can help reduce interest costs, one can also opt for an alternative, i.e., home loan balance transfer provided there are lenders in the marker who are offering lower interest rates without any hidden charges or costs. This can significantly reduce the interest payout without affecting savings and investments. For instance, a borrower has availed of home a loan of INR 40 lakh five years ago at an interest rate of 7.70% for a tenure of 20 years. The current outstanding would be INR 33.5 lakhs. Now, if this loan amount is transferred to another lender at a 7% interest rate for the remaining tenure, the borrower can manage to save about INR 6.9 lakhs in interest costs without deploying their savings.

Meanwhile, Jairam Sridharan MD of Piramal Capital & Housing Finance highlights the following pointers:

6. When a borrower makes part payments for home loans, either the loan tenure is shortened, or the EMI reduces. Depending on the requirement, the borrower must carefully assess and choose between the two. A reduction in the tenure will help save on the total interest payable, and the reduction in the EMI will lower the monthly outflow.

7. The emergency funds set aside for unforeseen events must be kept intact and the borrower may use other alternatives to prepay the home loan. It is not practical to exhaust the emergency funds and then borrow additional costly funds when the unexpected need arises.

8. Prepayment of the home loan during the initial part of the loan tenure is always a good option. This can help reduce the EMI or pay a much lower interest amount on the reduced principal outstanding after prepayment. If a borrower happens to receive a lump sum amount in the later part of the tenure, then it may be a good idea to invest it elsewhere and repay the home loan in the normal tenure. The borrower may also seek the lender's help to choose the best EMI option.

9. Individuals generally do not have to pay any prepayment fees or charges towards their home loan procured on a floating rate basis. However, it is always advisable to check for any hidden costs to avoid any surprises. The borrowers must seek the lender's help to be aware of the terms and conditions and clarify any doubts before making the prepayments.

10. The investments set aside for other long-term goals such as retirement planning, children’s education, and other big-picture costs must ideally not be liquidated for prepayment of home loans. Doing so may adversely impact the financial health in the long run and borrowers may be forced to avail of expensive loans to achieve their financial goals.

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