Home Loan Prepayment, A Wise Decision?

Team SahiBnk

20 September, 2023

Owning our own home is a dream of every Indian. A place where everything belongs to the self, a place that is created and decorated by us. But, as the dream is a lifetime dream, the investment is a long-term investment, maybe 15 or 20 years. When you buy a house, you take a big loan from financial institutions or banks and pay even for a longer duration along with a portion of the cost as a downpayment. And, as it is said, the longer the commitment, the slower the process. So, to no surprise, almost 45% of new home buyers delay their purchase worrying about making a downpayment of 16%-20%.

Suppose you make the commitment, take a loan of ₹50,00,000 at a 9% interest rate, buy your dreamy house, and start paying your EMIs. It has been five years of you paying the equated monthly installment and apart from it you have even saved a considerable amount of money. What will be your next thought? To prepay your home loan amount and lessen your burden, isn’t it? This is because a big amount with longer tenure, irrespective of the interest rate applied, will always get you to pay much more than borrowed in the form of interest rate. But wait, will it be the financially correct decision, or you should investigate more with your financial advisor?

Prepayment of the home loan becomes an idea due to various reasons. Whatever the reason, having surplus savings, planning to take a business loan in the future, or maybe you want psychological peace, home loan prepayment is subjective and there are various factors to consider before the final decision.

Tenure-Based Approach: Money Saviour Approach

A home loan allows you to make partial repayment during the loan tenure. Have you noticed that in the early days of the repayment tenure, banks collect more of their interest and less of the principal amount? As you move toward the end of the loan tenure, the principal amount increases and the interest amount decreases. So, for your ₹50,00,000 loan of 15 years, if you plan to prepay a part of the loan in the 5th to 10th year of the tenure, you will get the longer side of the stick. otherwise the shorter end of the stick. Thus, considering the tenure-based approach is the best way to proceed with your judgment toward the prepayment of the home loan.

Ready To Forgo Tax Benefits?

When you prepay part of your remaining home loan amount, you lessen your outstanding amount, and subsequently the interest rate on the remaining amount. This results in forgoing the tax benefits a home loan offers under 24B and 80C in which you can claim a deduction on a home loan interest up to 2 lakhs, applied separately on a joint home loan, and principal repayment up to 1.5 lakhs respectively. Thus, if you plan for a prepayment, consult your financial advisor to find out the optimal prepayment and get maximum tax benefits along with interest savings.

Have Better Plans for The Money Saved from Prepayment

When you prepay any part of your home loan, you lose your savings. So, always plan better use of the money you save while lowering the interest rates or saving the EMIs. It is never advisable to utilize your long-term invested money like money funded for retirement. On the other hand, it is also advisable to complete your loan before retirement age. If your EMIs are to be continued even after your retirement, meet your financial advisor, make strategies, make considerable prepayments, increase your EMIs, and reduce your loan tenure.

Apart from the above point, here are some of the other prominent reasons why prepayment is a good idea:
• A great saving on the interest cost is one of the prime reasons to make prepayment and complete your home loan as early as possible.
• If used wisely, the amount saved from interest costs can fuel life’s other goals like your child’s education, funding your retirement, and starting your business. Even the investment of the amount in SIP, mutual funds, or any other plans can give better returns.
• When you complete your long-term home loan early, you improve your eligibility for other big and small loans.
• When you do prepayment, you get the ownership of a greater part of your home and even get complete ownership earlier.

Thus, prepaying a home loan can be beneficial as well as a financially wrong decision if not made consciously. Moreover, before moving forward, it is important to deeply study your loan agreement and understand prepayment penalties. Also, evaluate your financial goals before making the final decision because your prepayment decision should always fulfill your financial situation and priorities.

Other blogs

Features Of Kisan Credit Card

There is no if and but attached to the point that agriculture is the backbone of the Indian...

Team SahiBnk

23 Febraury, 2023

Short-Term Personal Loan Holding Your Long-Term Goals

Has it ever happened that you are at the end of your car-buying journey, suddenly your budget...

Team SahiBnk

18 April, 2023

ABCs of Credit Scores: The Comprehensive Guide to Financial Well-Being

How was your experience when you, for the very first time, applied for a loan? Was it approved in...

Team SahiBnk

27 June, 2023

4 Reasons Why Credit Cards Are Important For Your Financial Health

Get a credit card? A financial trap. Ask your parents or grandparents and you will get to hear...

Team SahiBnk

08 September, 2023

How Does a Good Credit Score Affect Financial Decisions?

When it comes to applying for a credit card or a loan, each factor matters. And each factor plays a...

Team SahiBnk

6 October, 2023

Why Is It Better To Take A Loan From A Bank Rather Than A Money Lender?

India is the country where most of its population depends on farming and small businesses. About...

Team SahiBnk

23 October 2023

Difference Between Your Credit Score and Credit Report

Credit score and credit report are among the most talked about topics in the world of finance and...

Team SahiBnk

3 November 2023

FinTechs Empowering Farmers: Digitizing Kisan Credit Cards and Streamlining the Loan Process

India is a country where 50% of the population is largely dependent on agriculture for their...

Team SahiBnk

15 March 2024