Curated By: Business Desk
Last Updated: December 01, 2023, 18:01 IST
Prepaying can reduce the debt burden.
Prepaying a home loan means that you can use any extra money that you may have to repay (in full or partially) before the end of the loan period.
If you have a home loan and you want this financial commitment to end early, then this article is for you. The home loan’s tenure can span over or up to 15 years, depending on the equated monthly instalments (EMIs) you can pay. For long-term loans, the EMI is lower but the interest rate is higher. So, paying off the loan before the period makes sense as you have to pay less towards interest. If paid at one go, you are free from the shackles of debt. There are also certain tax deductions a person will have to forgo if they opt for the prepayment of a home loan. Here are the pros and cons of prepaying a home loan, if it is a viable option.
Prepaying a home loan means that you can use any extra money that you may have to repay (in full or partially) before the end of the loan period. It can reduce the debt burden and lead to the period of the loan decreasing if significant money is invested.
What are the factors one should consider before prepaying their home loan?
The Period of Tenure Left
When we talk about home loans, it is better to make additional payments early, because this will reduce the burden of debt in the longer run. The additional amount payment would convert into the principal loan amount, rather than the interest of the loan. In simple terms, the interest amount will be lowered in the coming months, based on a reduction in the outstanding loan.
Rate of Interest
If the bank is charging a high interest rate, then it might be a good idea to prepay your home loan. This will also lower the owed debt to the bank.
Source of Surplus Funds
Another factor to keep in mind is the source of the surplus funds (extra funds). Exhausting your savings or emergency funds is not a wise idea to repay your home loan. The move may leave you in a vulnerable position during any financial need.
Disadvantages of Prepaying a Home Loan
If you prepay your home loan, later in the tenure the benefits will not be much. Apart from that, borrowers may miss out on the tax deduction of up to Rs 1.5 lakh under Section 80C.
There is an exemption of up to Rs 2 lakh on interest paid on home loan and these deductions will not be valid in case of prepayment.
Prepayment of home loans can have several advantages, but only if the timing of the additional payments is right.