Foreclosing a Home Loan: Do?s and Don?ts

Posted by Arwind Sharma on July 6th, 2017

A Home Loan helps you fulfill the dream of purchasing your own home. Yet it also brings a considerable financial strain on your income. But deciding on whether to close a Home Loan can be difficult.

For certain individuals, the thought of existing EMIs creates a continual psychological stress. In such a case, it is always better to consider prepaying the Home Loan. At the same time, the person should also be prepared to pay a larger amount as the EMI.

This may further lead to another dilemma i.e. choosing between savings on interest paid to a bank, or the tax benefit in terms of saving on tax paid to the government.

Under the Income Tax Act, Home Loans are eligible for certain tax benefits, as per section 80C for the principal amount repaid, and as per section 24C for the interest paid on the loan.

In case the house is self-occupied, the maximum deduction for the interest is Rs.2 lakh per annum. So if the total interest paid is greater than the tax deduction amount, it makes more sense to invest money in closing the loan. And if the property has been rented out, it is possible to claim the entire interest as a tax deduction.

However while closing a Home Loan, it is also wise to pay attention to other loans you may have taken such as a vehicle loan, education loan, or personal loan, that carry a higher interest rate. It is advisable to clear these higher interest loans as the effective cost of a Housing Loan is considerably lesser than that of these loans.

And if you still have some surplus income after closing these loans, you can then consider also closing the Home Loan. Before that, you need to calculate your Home Loan Foreclosure amount carefully.

Further, one can have a choice between closing a Housing Loan and choosing to invest the money. In this case, you’ll have to compare your earnings from the investment post taxation to the net cost you will incur on the Home Loan. If the investment is bringing you a higher return, it is advisable to keep the money invested instead of using it to close the House Loan.

Some people also prefer to keep their money in a fixed deposit instead of closing the Housing Loan. But it is important to know that a fixed deposit offering a 7% interest will only amount to a post-taxation return of 4.85%. This is considerably lower than the 6.5% interest you can save by closing a Home Loan.

In conclusion, closing a Home Loan is a significant decision that needs to weigh against the financial impact on your income, investments, and taxes. One can proceed with it only after taking all these things into consideration.