Owning a home is a big milestone for most people – it’s a big step that requires a lot of planning and hard work. While many people manage to fulfil this dream with the money they have been saving for years, a home loan is a saviour for those needing financial support to turn the dream into a reality. Despite having this option, many people consider it a risk because of the interest rate and EMI involved.
While it’s true that EMIs can often put a strain on finances, it shouldn’t be a reason to shy away from getting a loan for house.
There are many ways to handle housing loan repayment, and the prepayment option is an excellent idea for those looking to save money.
In this article, we will discuss the top five reasons why prepayment of a home loan is a good idea.
Read on!
Home Loan Prepayment – A Primer
Home loan prepayment is a convenient feature offered by lending institutions, granting you the flexibility to repay your housing loan either partially or entirely before the designated loan tenure concludes. This avenue is commonly chosen by borrowers who have amassed sufficient funds to settle their debt ahead of schedule. This proactive approach can lead to reduced interest payments and an accelerated path to becoming debt-free.
Things to Check When Opting for Home Loan Prepayment
Here’s a list of things you must check before opting for a loan prepayment facility:
1. Prepayment Charges
In situations involving home loan prepayment, most lenders institute prepayment penalties due to the financial implications it poses for them. Therefore, it’s crucial to assess the potential penalty amount before proceeding with prepayment. If the calculated penalty surpasses the total amount you would pay if you adhere to the regular payment schedule, it might be advisable to reconsider opting for prepayment. This careful consideration ensures that your financial decision aligns with your overall savings and loan management strategy.
2. Tax Benefits
Having a home loan offers great tax benefits – on the total principal amount of your housing loan that you pay off each financial year, you are eligible to claim a tax exemption of a maximum of Rs. 1.50 lakh.
You are also eligible for a tax break on the interest you pay on the loan (up to Rs. 2 lakhs in the case of self-occupied property; the full amount in the case of rented property).
Furthermore, the government’s emphasis on “housing for all” may cause the tax benefits for housing loans to grow over time. These tax benefits end when you fully prepay the loan; if you only partially prepay, your tax benefits are reduced.
3. Stage of the Loan
Prepayment is a good decision if you have given it a thought at the initial stage of the loan tenure because, around that time, the interest component stays high. If you only have a few months left, this would be a bad decision, as you might end up paying more to the lender.
In this regard, using a home loan EMI calculator is a smart move during this process, as it will show you an estimate of how much money you will be paying to your lender in total under different circumstances.
Top 5 Reasons Why Prepayment of Home Loan is a Good Idea
Given below are the top five reasons to showcase why prepayment of a home loan is a good idea:
1. Savings on Interest Charges
It goes without saying that the most common reason borrowers opt for this facility is interest saving. You can save more money the faster you repay the loan.
Your monthly mortgage payment includes a significant amount of interest, particularly for long-term loans. This works best if you make up your mind regarding housing loan prepayment at the initial stage.
2. Better Management of Financial Resources
While evaluating the potential savings resulting from prepaying your housing loan, it’s essential to factor in the anticipated costs connected to these savings. The surplus funds available after settling the housing loan early could serve your broader life objectives more effectively if allocated judiciously.
This involves assessing how these funds align with your other financial aspirations, such as investments, emergency funds, or pursuing personal goals. Balancing the impact of prepayment on your immediate finances and long-term objectives helps you make a well-informed decision that optimally utilises your resources.
3. Lower Utilisation of Credit
Home loan prepayment impacts not only your finances but also your credit score over time. Additionally, a loan raises the credit utilisation ratio, greatly impacting your credit score.
Additionally, home loan prepayment also reduces your ratio of credit utilisation. Keep all EMIs, including those from credit card debt and loans, under 30% to 40% of your gross monthly income to maintain a high credit score.
4. Improved Eligibility for Future Loans
Getting loans in the future can be difficult if your credit report shows that you have a large outstanding loan. This is especially true if you want to buy a vehicle, pursue education, start a business, or pay for medical expenses. Lenders may offer you less than you need because they want to minimise their risk.
To avoid this situation, it’s a good idea to pay off your current loan as quickly as possible. This will not only improve your chances of getting better loan terms but also build trust with lenders.
5. Peace of Mind
Lastly, prepayment of a home loan can be an excellent option because it gives you the sense of security that the home you have dreamed of is all yours. A loan for your house is a long-term contractual commitment, and any accidents caused during the loan tenure can result in financial setbacks. Settling the loan ahead readies you for most challenges.
Conclusion
Getting a loan for your house is a big step that requires a lot of planning, and for hazard-free repayment, a borrower must budget their finances accordingly. By choosing the prepayment facility, you not only save money but also increase your credit score, improving your financial well-being in the long run. Make sure you have a proper prepayment strategy in place to take full advantage of this option and achieve your financial goals sooner.
