All, Miscellaneous, Realty
Home loans are considered to be one of the most straightforward and secure forms of investments as they incur low-interest rates and provide you with several tax benefits. Typically, home loans are a long-term commitment, lasting from 15 to 30 years.
However, depending on your financial circumstances and goals, you can opt to prepay your home loans -- repaying the total loan amount in full before the loan tenure expires. Most lenders allow you to partially or wholly prepay your loans, with certain terms and conditions to be met.
Prepaying home loans come with its own pros and cons, and if you’re considering prepaying your home loans, then consider the following aspects before making a final decision.
1. Reduce your debt
Being in debt is never fun, and it can become a major cause of stress, especially if you are nearing your retirement. Several experts recommend paying off all mortgages and loans before, or soon after your retirement.
If you have the cash to cover your home loan in one go, and you wish to debt-free, then prepaying your home loan makes sense, rather than shelling out lacs of rupees every year. While home loans have the lowest interest rates, the amount is still quite significant.
2. Improve your credit score
Prepaying your loan, or any debt in general, significantly boosts your credit score. Anything that improves your creditworthiness is always an excellent financial solution, and you should consider it.
The only factor you need to ensure is that your lender conveys to the credit bureau that you have prepaid your home loan so that you can improve your credit score.
3. Get another loan with better rates
Prepaying debts improves your credit score, which guarantees you better interest rates if you wish to take another loan. Lower interest rates are always beneficial, and the next time you want to invest in property, automobiles, or any other option that requires a significant financial investment, you can rest assured that you will get much lower interest rates.
Home loans come with several tax benefits under different sections of the Income Tax Act, namely Section 24, Section 80C and Section 80EE.
Under Section 24, you can claim a tax deduction of up to INR 2,00,000. You can also get a deduction on the interest you pay for your home loan. Additionally, you can also claim a tax break if you’re using the home loan to buy, build, repair or renovate a residential property.
Under Section 80C, you can claim a tax deduction of up to INR 1,50,000. This section also allows you to claim stamp duty charges and registration fees.
If you’re a first-time home buyer, then you can claim an additional deduction of up to INR 50,000 under Section 80EE, which is over and above the deduction of INR 2,00,000. You can claim this amount every financial year, until you completely repay your home loan.
If you have investments in LIC and PPF, then you can take home loans against these investments without having to provide any collateral. If you prepay your home loan, then you miss out on all these tax benefits.
Using the extra money that you might have saved over the time of several years to prepay your home loan means you might reduce your emergency cash reserves maintained for unexpected financial contingencies.
We live in a world of uncertainty wherein we can be impacted by unfortunate events such as job loss, illness or a family emergency.
That’s why it makes sense to set aside a sufficient amount for emergencies. Make sure that if you opt to prepay your home loans, this emergency fund doesn’t get affected and you have enough finances available to take care of contingencies.
According to a new RBI (Reserve Bank of India) mandate, banks cannot charge any penalties if you prepay home loans with floating interest rates -- the interest rates aren’t fixed and can be adjusted.
However, home loans with a fixed interest rate will incur a penalty, which is usually between 2-5% of the remaining loan amount. If you prepay your home loan, the lender will receive a lesser amount and as a result, they charge the penalty to recover some of the lost interest amounts.
Prepaying home loan comes with its own advantages and disadvantages. It makes sense if you’ve just started your loan tenure and the EMIs take away a considerable portion of your income.
It doesn’t make sense if you’re nearing the end of your loan tenure, which is a fixed-rate loan as you will incur penalties and end up spending money that could have been invested in other, more lucrative opportunities such as mutual funds or equities. Carefully weigh the pros and cons and consult your financial advisor before deciding to prepay your home loan.