Should you prepay your home loan or not?
If you are a home loan borrower, prepaying it ahead of time must be your top most priority. However, many borrowers are in a dilemma that whether prepaying their existing home loan will bring any financial benefit to them in the long run. This is undoubtedly a debatable issue. Let us have a look on home loan prepayment in detail.
Some of the loan borrowers prefer to continue their regular EMIs for the said duration as it helps save them a good amount of tax. Here, it should be noted that no person on this earth, no matter how rich he or she is like that big chunk of money going out of their salary, every month. EMIs are always uncomfortable. Now here the question is, should you continue with your regular EMIs because they save you from paying tax to the government. And, where is that EMI going? To your pocket or your lender’s? Obviously, it is better to earn more and pay more tax than to just continuing your monthly EMIs for saving income tax.
While taking the home loan, you must have pondered through various EMI options like fixed, floating and hybrid type of loans. You must have compared the interest rates of the leading lenders online. It is suggested to pick floating interest for the longer tenure home loans as they keep changing with the market conditions. Though fixed rate of interest is always 25 -100 basis points higher than the floating rate; it works best for the short term loans. Another option is opting for a hybrid loan which allows you to choose between the fixed and floating type of loan interests. It is also advisable to try to finish off the loan within the first 7 – 8 years of the loan tenure as this is the period when your home loan lender charges mainly interest from your monthly EMIs. Hence, the payment made during the initial years will lower your principal and can make a huge difference in what you would have been paying to the lender, otherwise.
Some home loan products offer an overdraft facility, where you can put the surplus money in your loan account with a facility of withdrawing that sum based on your needs. For example, if you have saved Rs. 2 lakhs and not sure of prepaying your loan with this amount as you apprehend you could need this money in near future. In an overdraft loan product, you can easily deposit this money and can withdraw whenever required. It’s like prepaying with the option of withdrawing. You can search about home loan online to understand this.
Also, EMI is based upon your take home salary. As the years pass, your salary increases but EMI remains the same. So, tweaking the EMI structure can also help you repay your home loan faster, much ahead of the expected loan tenure. Even if you plan to do partial prepayments, it is advised not to reduce the EMI, rather the loan tenure. Partial payments can be systematic based on your planned savings, or it can be done with festival bonus, deposit’s maturity or cash gifts from relatives. A good chunk of partial payment can help you achieve completely owning your house. And, if you have more than one loan, you must first aim to prepay the one which is charging more interest.
A little bit of financial discipline and a strong will power will help you prepay your home loan really faster. So, next time whenever you wish to renovate tour living room or plan an international trip, consider investing that amount in your home loan account.
