For home financing or For millions of Indians, owning a home is a dream and home loan is the only available solution to make it a reality. Once it gives you the flexibility to buy your dream property, it also has some demerits in the form of a long term commitment of financing spanning, on an average, 15-30 years. However, did you know that this burden can be eased by significantly cutting down your expenses, with the help of prepaying your home loan? Home financing, Today Finserv Consulting India specializes in helping people maximize the benefits of home loan prepayment.
What Is Home Loan Prepayment?
Home loan prepayment refers to repayment of home loan amount in parts or in full before the scheduled tenure ends. It can be done through:
Part-prepayment – This involves paying extra along with your usual EMIs.
Full prepayment/Foreclosure – This is repaying the loan through paying the entire balance outstanding before the end of the loan tenure.
Employing either kind of prepayment both aid in alleviating your loan burden; however, they differ in terms of impact, strategy, and timing.
Advantages of Home Loan Prepayment
Interest Cost Saving
Taking a home loan prepayment is highly encouraged due to said savings on interest. Paying off a loan is designed in a manner where, to the home loan’s initial years, tend to give the bulk of the reimbursement toward paying back interest. Paying down the principal in advance during the early stages of the term will reduce the interest costs you have to spend.
For instance
If you were to take out a loan in the amount of 50 lakh rupees at an annual interest of 8.5% for 20 years, it will end up costing you around 52 lakh rupees in interests. However, by paying off one lakh each year starting in your third year, you will only spend 40 lakh while saving an estimated 12-15 lakh in interest in addition to finishing the loan 5-6 years earlier.
Loan Tenure Reduction
A different example of prepayment’s usefulness is that it allows you to move the date of loan-paying to be earlier than scheduled, enabling you to:
Pay off debts sooner.
Alleviating financial pressure.
Improve the trustworthiness for taking loans in the future. Your credit score goes up as well.
As a Consulting firm, Today Finserv recommends using bonuses, rewards, or return on investments for the year for part-prepayment of the loan.
Lighten the Load of EMI Payments
If it’s more convenient for you to keep the tenure the same, you may use prepayment to lower your EMI to reduce the burden on your cash flow. In turn, this helps with:
- Managing to Enhance the Cash Reserve
- Financial Stress Reduction
- Ability To Invest Elsewhere
Pro tip: At the time of the prepayment, ask the lender whether you wish to reduce EMI or tenure. If your aim is to reduce payout interest, choose to reduce the tenure.
Enhance Your Credit Rating
Making repayments, maintaining a certain level of prepayments, and additional such activities improve a borrower’s credit report. This makes him appear and prove being a more prudent borrower and thus in good discipline with finances which will:
- Help in elevating CIBIL score
- Enhance creditworthiness with further loans
- Increase the probability to avail the facility for loans at lower interest rates
Useful Personal Finance Strategies
Once your home loan is cleared or in a significantly reduced stance, you free resources for filling other financial goals like:
- Buy a property or investment
- Retirement planning
- Start an enterprise
- Educational plans for children
Loan prepayment helps achieve an ideal plan of gaining financial independence.
Peace of Mind
Indebtedness creates a ceiling stress level. Cutting down or removing your highest pending financial commitments offers great emotional and psychological easement. You experience the comfort of a home without monthly payments.
Types of Prepayment: When and How?
Part Prepayment
Can be done anytime during the loan tenure
No limit on the number of times you can part prepay
Suitable to people with periodic lump sum disbursals such as bonuses, tax refunds, or maturity of an investment.
Full Prepayment or Foreclosure
Paying the full outstanding loan amount before the end of tenure.
Suitable for those with a large corpus and want to deplete debt sooner.
Note: It’s prudent to check your lender’s policies regarding part and full prepayments. Most lenders provide zero prepayment penalties restraining the part and full prepayment policies, especially on housing loans with floating rates.
Tips for Effective Home Loan Prepayment
Early Bird Advantage
Seniors starting the payment schedule tend to save more by bankrolling the prepayment earlier. The later into the timeline, the more attention is given, but crops only benefit from the initial boost: The earlier, the better.
Direct payments are best made with freeflow assets like bonuses and stimulants. Discretionary spending would do well without leading add-ons meant for use after.
Raise EMI Each Year
As you progress in your career and receive salary increments, consider increasing your EMI to 5-10% every year. This speeds up repayment automatically.
Avoid Paying Off High Return Investments
Avoid foreclosing long-term investment products such as Mutual funds or PPF just to free up funds for prepayment. Striking a balance between reducing liabilities and wealth growth always remains essential.
Use an EMI Calculator
Utilizing a home loan prepayment calculator helps gauge the potential reduction in tenure or monthly EMI payments resulting from partial prepayments made at various times.
Prepayment Tax Implications and Charges
Prepayment Penalties
Floating rate loans (individual borrowers): No prepayment penalty as per RBI guidelines.
Fixed rate loans: 2-3% prepayment penalty may be charged by some banks.
Corporate borrowers: May attract charges regardless of rate type.
Advice: Always check with the lender regarding prepayment conditions and acquire written documentation.
Tax Implication
Home loan interest paid up to ₹2 lakh per year is tax-deductible under Section 24(b).
The principal repayment amount up to ₹1.5 lakh per year is deductible under Section 80C.
Does Prepayment influence Tax deductions?
Yes, as the amount of loan interest payable decreases, the amount of tax deduction will likely reduce too. But in most cases, the savings from prepayment outweighs the loss of lowered tax benefits.
From educating you on how to make a prepayment to fitting it into your financial strategy, we make certain that it is the right decision.
Conclusion
Strategically planned home loan prepayments can prove beneficial in many ways. Compound interest savings, early loan closure and reduced debt figures are among the many benefits. However, loan prepayments should be evaluated in conjunction with one’s defined goals, tax situation and liquidity needs.
Every prepayment you do today will translate into financial freedom in the future. Today Finserv Consulting India will assist you in strategizing your home loan journey through meticulous guidance and expertise so that your prepayments are done wisely.
