Home loan is a popular way of funding and supporting your crucial home-buying decision. Now, when you have an outstanding home loan, you often wish to prepay, at least a portion of it as soon as possible. Right! But, is “Home loan pre-payment” actually a good idea? Or does it make sense to utilise the extra income that you received in a different way?
As and when some extra cash or bonus drops in, the primary thing that comes to your mind is “Let’s pre-pay our home loan”. The reasons can be many, you want to reduce the interest component, lower your loan liability or you simply wish to lessen your overall debt. There’s nothing wrong in thinking so.
But, let’s do a reality check on certain crucial factors like: Is it wise to look forward to the home loan pre-payment option? Does pre-paying your home loan gives you the real benefits? Should you use any excess funds to pre-pay your home loan?
PNB Housing gives us the answers to the dilemma.
Home Loan Pre-Payment: A Glimpse
Home Loan pre-payment refers to the early payment of your loan either partially or in full. This is usually done before the completion of the tenure of your loan. E.g. let’s say, your home loan was granted for 15 years and you think of pre-paying it just after 7 years. As a loan borrower, you intend to clear your dues at a prior point of time than scheduled.
But, is it worth doing so? Is it prudent to prepay home loan or there are better ideas to gather? It’s better to assess certain variables before thinking of home loan prepayment.
Factors to Consider Before Home Loan Pre-payment or Pre-closure:
1. Sound Financial Planning:
Before initiating home loan pre-payment, make sure you have solid plans to secure your financial future. Are you financially ready? Have you planned your investments wisely?
Keep aside adequate amount to meet your long term financial goals. Build an emergency fund to protect you and your family before thinking to pre-pay your home loan.
2. Better Investment Avenues:
At any time, if you have surplus money, you have numerous investment instruments as well. So, why not explore high income opportunities instead of pre-paying home loan, which is anyways the cheapest form of borrowing for an individual. Do a comparison of the rate of interest that you may receive by investing in a financial instrument than what you are shelling out on your home loan. Your funds must be diverted in fruitful investing directions before stretching your hands towards pre-payment of a home loan.
You can grab higher post tax returns on investments as compared to effective cost of housing loan. So, you’ll definitely like to choose the investing option rather than pre-payment.
3. Interest rates on Different Loans:
The interest rate on housing loan is relatively lesser as compared to personal loans, credit card loans or auto loans. So, it seems rather practical to first pay off the loans that carry higher interest rates.
Reduce your debts by clearing off any other substantial dues instead of directly jumping into a home loan pre-payment or pre-closure.
4. Loan Stage:
While pre-paying a home loan, your primary concern might be to reduce the interest component in the EMI. The interest is usually high in initial years, but it gradually decreases towards the later stage of the tenure. So, if you are in the mid or later stages of your loan, the pre-payment might not give you the real benefit of saving interest amount.
5. Tax Benefits:
If you have a housing loan, you can claim a tax deduction Under Section 80C of The Income Tax Act. Both, the principal and interest paid on home loan offer you different tax benefits. So, pre-closure of your loan shall take away these benefits. Why to miss these?
Should You Prepay Your Home Loan?
The final decision of pre-paying your home loan should be based on your priorities and financial well-being. If you have additional money flowing in, it doesn’t always sound practical to pre-pay a home loan. You can think of utilising this money to build a strong investment portfolio.
Simply stating, if home loan pre-payment is not a financial burden and you can manage it well, then there’s no point in sacrificing the benefits that accompany a home loan. In fact, it is sometimes beneficial to continue a home loan rather than paying it off.
To avoid any risk of uncertainty, you can anyways look for a good and reliable home loan insurance. This shall safeguard your near and dear ones from any loan payment obligation due to any unforeseen event. A number of good home loan insurance plans are available to protect your family.
On a personal front, paying off your debts early might seem to be a sensible option. But, this can’t be considered as the best alternative for all. Individual circumstances vary, so you need to analyse your present situation and then only make the ideal financial move.