Home Loan Prepayment: Important Things to Know

When you apply for any loan, be it a personal or a home loan, you essentially take on a debt. The longer the repayment period, the longer you will be in debt. As a borrower, you may want to pay off the loan as soon as possible and be debt-free, right? Well, one of the best ways to do that is to opt for prepayment, especially if you have taken a big-ticket loan like a home loan. 

If you are not sure what home loan prepayment is, then this guide is just for you as we discuss everything you would want to know about it. Read on!

 

What is Home Loan Prepayment?

Financial institutions provide a service that enables you to pay back your loan in full or in part before the end of the loan's real term. It is called home loan prepayment. When you prepay the loan, you essentially pay off a small part of the outstanding principal amount. While most lenders allow prepayment of the loan, some of them may charge a certain fee for it. 

 

Important things to consider before prepaying the home loan

Prepaying a home loan is an important financial decision as you may use a significant part of your disposable income to reduce your debt. Therefore, you must read the path carefully. Also, you must know the home loan prepayment rules, including the associated charges, and decide accordingly. Here are some considerations:

 

• Funding needs

Before you prepay your home loan, make sure you have enough funds at hand to take care of all your other financial obligations like savings, investments, etc. You must also have surplus funds in hand to take care of any unfortunate incidents like medical emergency, job loss, etc. 

 

• Stage of the loan

One of the most significant benefits of prepaying a home loan is that it helps you save on your interest payments. The interest component in your monthly EMI (equated monthly instalment) is high during the initial few years of the loan tenure. Therefore, if you prepay the loan in the late stages, you may not get all the benefits of savings on the interest. In such cases, it is better to invest your funds and get valuable returns. 

 

• Tax benefits on home loan

As per the tax rules in India, you are eligible to get a tax benefit of up to Rs. 1.5 Lakh and Rs. 2 Lakh on the repayment of the principal amount and interest amount in one financial year under Section 80C and Section 24 of the Indian Income Tax Act. 

You can enjoy these tax benefits throughout the loan tenure, which means you can save a valuable amount in the long run. However, if you prepay the full home loan amount, you will no longer enjoy the tax benefits. You will get a lower tax benefit if you make a part prepayment. 

 

• Prepayment charges

You must decide whether you want to prepay your home loan by considering the cost of prepayment. As per the RBI guidelines, the lenders cannot levy prepayment charges on flexible interest rate loans. Meanwhile, for fixed-rate loans, the prepayment charges may vary from one lender to another. It is usually a certain percentage of the amount you prepay, ranging from 1% to 3%. 

You can use the home loan prepayment calculator to see how much money you are saving on the interest payment against the cost incurred on prepayment and take an informed decision accordingly. 

 

• Prepayment lock-in period

Many lenders have a lock-in period, ranging from 1 to 3 years for prepayment. That means, during this period, you cannot make part or full prepayment. However, per RBI guidelines, home loans taken on a floating interest rate basis do not have any lock-in period. 

 

Benefits of home loan prepayment

Prepaying the home loan has several benefits, including:

• Savings on interest payments

Undoubtedly, one of the most significant benefits of home loan prepayment is that it helps you save a significant amount on your overall interest payment and reduce the loan tenure. The sooner you prepay, the more interest you can save. 

You can use the home loan prepayment calculator available on the lender’s website to know about the exact interest savings and choose to prepay accordingly as per your financial condition. 

 

• Focus on other financial commitments

When you choose to prepay your home loan, whether in part or full, you can get significant relief from the monthly payments burden. That also means you can channel the money better, use the amount saved on interest payments for investment purposes, and focus on wealth-building or meet other financial commitments. Not to mention, prepayment gives you peace of mind knowing that a large debt is off your back. 

 

• Be eligible for other loans

When you are nursing a home loan, getting another loan, like a personal loan, education loan, or business loan, can be difficult as your credit report will reflect a large mortgage. Also, the lender may be sceptical about extending the loan to you and question your financial capacity to repay both loans at the same time. 

However, when you prepay the home, it not only showcases your strong financial capacity but also you would not have any large debt, and you can be easily eligible to take another loan. 

 

Should you opt for home loan prepayment or not

The decision to prepay the home loan or not entirely depends on several factors like the interest rate, prepayment charges involved, balance loan tenure, etc. Make sure that you do your due diligence, be aware of the prepayment rules, and finally make your decision so that you can reap maximum benefits from it.