Prepayment of Home Loan

Prepayment of Home Loan

Contents:

  • Meaning
  • Prepayment charges
  • Benefits of prepayment
  • Disadvantages of prepayment
  • Important points to consider 

What is prepayment of Home Loan ?

Home Loan prepayment means making a lump sum payment towards a Home Loan ahead of the due date.

 

Home Loan prepayment charges

A Home Loan prepayment penalty can range anywhere between 0.5%- 3% on the outstanding loan amount, depending on the terms and condition of your loan agreement. The borrowers who have availed a Home Loan at floating interest rates are generally exempted from Home Loan prepayment charges.

 

Benefits 

  • If you prepay the home loan, you can substantially reduce the interest component of the home loan. The principal amount gets repaid faster, helping you close the home loan early.
  • It helps to reduce the Debt burden

 

Disadvantages

  • Your credit score can be negatively affected if you choose to prepay your Home Loan.
  • Foreclosure of Home Loan amounts may attract penalties.
  • You will only be able to make a Home Loan prepayment if you have sufficient surplus money. However, foreclosing on a Home Loan also means you are losing on your savings.
  • When you claim for tax deductions at the end of the financial year, the loan repayment of your home allows you to get a tax deduction up to ₹2 Lakhs. 

Important Points to consider before prepayment

  1. RETURN FROM INVESTMENTS – The cost of prepayment should also be compared with the returns that can be earned from investments. If you have the opportunity to earn returns which are higher than the home loan interest, then it is better to invest the surplus funds rather than using the same to prepay your home loan.
  2. SAVING ON INTEREST – The main benefit of prepayment is the reduction in interest outflow. The interest component in the EMI is highest during the initial stage of the home loan. Therefore, prepayment of loans in the mid-to-late stage may not give you the full benefit of saving on interest. In such cases, it is prudent to invest the surplus funds.
  3. LOW INTEREST LOAN – Housing loans are easier to service – the interest rate on home loans is generally lower than the rate of interest charged on other loans such as personal loan or credit card loan. Therefore, if you want to reduce debt, it is better to prepay high interest-bearing loans on priority basis (as against housing loans which carry a lower rate of interest).
  4. TAX BENEFITS – You are entitled to claim tax exemption of up to Rs.1.50 lakh per financial year on repayment of principal amount of housing loan. You can also get tax exemption on interest paid on housing loans. On full prepayment of your housing loan, you will no longer enjoy these tax benefits; in case of part prepayments, you will get lower tax benefits.

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