Pre-pay your home loan, but know these 5 points first - check this guide
The borrowers often go through confusion and dilemma over when to prepay loan. The borrowers also face confusion about whether to use surplus funds to prepay the home loan or invest it elsewhere.
Having an home loan? Want to prepay it and have no idea whether the time is right not? Fear and anxiety are surely there as money is at stake and no one wants to book a loss. Well, here's the solution. When you purchase a house through a home loan, banks or lending institutes take into account your present earnings and sanction a home loan, based on your eligibility. However, one may want to prepay the loan, with increase in income over time. One may be able to accumulate surplus funds and aim to get rid of loan burden as early as possible. The borrowers often go through confusion and dilemma over when to prepay loan. The borrowers also face confusion about whether to use surplus funds to prepay the home loan or invest it elsewhere.
The decision of pre-paying a home loan depends on various costs and benefits involved. Amit Kukreja, CEO Weinvest Advisors told Zee Business Online, ''One should take the decision to prepay the home loan, only after taking into account the requirement of funds in the near future for any purpose, including contingencies. Home loans are available at relatively cheaper interest rates, compared to other loans like personal loans and gold loans. If your alternative investment has a cheaper ROI or you cannot afford an EMI further, you can opt to prepay your home loan partially or fully.''
Here are some of the factors that borrowers should consider, before making this decision.
1. Tax element:
The interest paid on a home loan can be claimed under Section 24(b) of The Income Tax Act. In case the property is self-occupied, you are allowed deduction of only up to Rs 2 Lakh per year on the interest component. So, as long as any part prepayment does not bring the amount of interest below Rs 2 Lakh, it will not have any impact on your tax liability, explained Kukreja.
2. Prepayment processing charges:
Sometimes lenders also levy some prepayment charges and the amount of such charges depend on the terms agreed at the time of taking the home loan and will be as per the agreement executed by borrower. Such charges vary between 0-4 per cent. You should check all these charges and make a decision accordingly.
3. Alternative investment options:
The one important factor, that an individual should consider before making a decision of prepayment is an ROI of his/her alternative investment. ''If your returns from your investment is cheaper as compared to the interest rate on home loan, you can go for a pre payment,'' added Kukreja.
4. How will you pre pay your loan:
Now the most important thing is to determine, how will you prepay your home loan. You can set off your loan with some surplus funds you have, or can increase your EMI chunk. In case you have just availed a loan, you can also do an SIP and use your investment to prepay your loan later. However, that should only happen if your returns from investments are lower than home loan burden.
5. Other factors:
Many people prefer to not have any debt, but some consider home loans cheap and carry them for longer tenures. There are number of other factors like, willingness to carry on the loan, financial support from any investment, using your home as a residential purpose or income generation. These reasons contribute a lot to a significant number of home loan prepayment cases in India.