Do you have an outstanding home loan and have received a nice bonus or other form of gain?
You must have got a sense of where we’re going with this line of thought. Yes, you can consider Prepayment of your home loan.
What is Prepayment?
As the name clearly suggests, Prepayment is when you choose to pay an additional amount of principal of your loan back, ahead of time. This reduces the principal outstanding, which in turn reduces your EMIs or your remaining loan tenure.
Sounds pretty simple, but it has a few rules to it. Don’t get stressed, Regrob is here for you. We will help you by familiarizing you with all these terms and conditions.
Why prepay your home loan?
An obvious question since we are talking about Pre payment. What is the hurry?
This is because Home Loan Prepayment is financially valuable for Home Loan Borrowers. It helps to reduce overall interest burden and thus results in lessening of cost of the property. How does that happen? Well, you see that any type of debt including Home Loan is not good for financial health of an individual. The Average Home Loan tenure in India is 8-10 years which means Home Loan Prepayment is preferred by borrowers to clear off Home Loan. For some people, an outstanding loan is a cause of stress. And they seek to pay off the entire loan amount at the earliest, which is well and good. Future uncertainty may encourage people to pay off the loans before time. You get rid of the continuous hassle of repaying the EMIs and interests and stuff. So it’s a pretty smart move which saves your time, as well as money.
Interest savings on Prepayment
The interest you owe on your home loan can be reduced by making Prepayment of your home loan. You can decide to partly prepay your loan regularly, for example every 3 months, continually reducing your principal outstanding, and bringing down the total of interest you will owe the bank. Remember, the longer the tenure of the loan, the more the interest you are paying, so part prepayments are a good way of saving on interest payments. So prepayment will help you save some money that you would otherwise be paying as interest. So instead of hanging on to that home loan and emptying your pockets in interest payments, pre pay the loan if you can at the earliest. Click here to read about Home loan By Bank of Baroda.
Negotiating with the lender
Repayment charges are not essentially fixed. We suggest that you negotiate with your banker first. Brownie points on having a good credit history, because that will work in your favor and your repayment fee will be lessened. It might even just be waived fully. If your loan has a lower interest rate than the current rate of interest (if you have taken a fixed home loan) then banks would be more open to letting you prepay your home loan and waiving the fee. Moreover, some banks like SBI will not charge you anything on prepayment of home loan if you are pre paying the loan out of your own money, your own savings instead of switching lenders. The only condition to this is that more than 3 years should have passed since you took the loan. Now, for Floating rate of interest there is no prepayment fee. But yes, negotiating is important!
Before you pre pay your home loan, you would want to know how much interest you will save. And for that, you need to check your amortization Schedule. Not sure what that means? Don’t scratch your head. What are we for?
According to Investopedia, An amortization schedule is to a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid. Early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan’s principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term. In an amortization schedule, the percentage of each payment that goes toward interest diminishes a bit with each payment, and the percentage that goes toward principal increases.
So why do you need to check your amortization table?
You need to do this to see how much interest you will be saving by prepaying your loan, and compare this to the prepayment charge you will have to face. If interest saved is greater than the prepayment fee, you can consider prepaying your loan. But speaking with experience, you will probably find that the savings on interest payments are so huge as compared to the prepayment penalty, that it is much wiser to prepay if you can.
Invest or to prepay
We’re talking of opportunity cost here. If you have enough surpluses at your disposal, you might be confused as to whether you should invest that money or use it to prepay your home loan. Judge the two scenarios realistically. Compare the returns that are anticipated on your investment with the benefits of saving in form of interest on prepayment. You can easily make your choice then. When the interest rates on home loan are higher than the income earned on investments, it makes more sense to prepay the home loan, than to invest the same.
If you are thinking of investing make your choice wisely. If you are someone who has a short term investment horizon and a lower risk appetite then you could invest in debt rather than equity, earn a lower post tax rate of interest on the debt investment than what you would be paying on the home loan, and thus it would make more sense for you to prepay the loan. Weigh the pros and cons and make a good decision. Click here to read about Home Loan Myths in India.
These are some general suggestions before you take the big leap of pre paying your home loan. You need to be careful, since it involves a large amount of money.
Before prepaying any loan, make sure you have enough monies left aside to meet any emergency needs that might arise in the future.
It is a myth that prepayment is only beneficial in the initial years of the loan. When you prepay the loan, you are prepaying principal and reducing the future interest drain. This is beneficial at any and every point of time during the loan period, a little more in the beginning years though.
If you have more than one loan, prepay the one with the higher rate of interest rate first. No need to explain why. You are smart enough to know that it will result in higher savings.
Often, a question people ask when considering prepaying the home loan is to do with tax benefits. But remember that it is better to earn more and pay more tax than earn less just to pay less tax. When prepaying a home loan, there are only two things you should keep in mind: Interest Saving on prepayment and opportunity Cost involved. Tax benefits are not a major criterion.
So we hope that we have answered all the possible questions that pop into your mind when considering Prepayment of the home loan. If you still have any more to ask, you know who to turn to. We at Regrob are always there for you!
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