Prepayment of Home Loans: Good Idea or Bad Idea
In our country, Loans are always considered a headache. And even that’s true considering it as a responsibility, which you must fulfill without failing. Loans are always the prime funding source, whenever a person looks towards buying a home. In our country, most of the buyers are seen as funding their home purchase, with the home loans. While funding your dream home with the home loans is not a bad decision, it comes with some liability for the long term, which needs to be fulfilled at any cost. The EMIs and the additional burden of paying interest are just some of the downsides of any home loan, taken for buying a home.
Most of the home loans are taken for a period of 10 years to 20 years and people have to pay the EMIs each month, depending on the rate of interest and the loan amount. There may be a scenario, when you are left with some additional funds with you, and you may be thinking to prepay your home loans. If you have an outstanding home loan with you and you are thinking, whether to prepay your home loan will be a better idea or not, you should consider several factors, before making a conclusive decision. Should you invest those additional funds to meet other goals, or should you repay your home loan and get out of the home loan headache? Assess the different conditions before arriving at a final decision.
Know about the Home Loan Foreclosure
The Home Loan Foreclosure is an option with the home loan borrowers, who already have the home loan on running, whether to pay the entire lump sum amount and close the existing home loan, or pay some lump sum amount to ease off the burden of the Home Loan. It simply can be understood as the early repayment of your home loan and can be done in full or in parts.
Why is Home Loan Foreclosure done?
There are various factors, which influence someone’s decision on opting for the home loan prepayment. Among those, one is the getting rid of the extra burden of the liability of home loan. While the other reasons, may include the easing the EMIs which you have to incur every month; to complete the loan as soon as possible; to decrease the effective total loan amount to be paid to the bank. But the Home Loan repayment decision is not that straight forward, as many people can think of.
However, before making any decision on home loan prepayment, make sure that your finances are solid and you don’t need that additional lump sum amount in the near future. There are several calculation and considerations, which a person should do, before arriving at a firm decision on which way to go; either to opt for the home loan prepayment or let it run and utilize the lump sum amount for other purpose.
Factors to consider before deciding on your Home Loan Prepayment
Psyche: While, some people can easily handle the burden of the EMI, which incur every month, there are some people who feel overburdened with the ongoing loan. This is what is called as Psyche. If, you are feeling burdened and consider any type of loan as a burden on your shoulders, it will be a better idea to get out of the home loan, by prepaying your home loan instantly. There’s no other consideration to take care of, while assessing whether you should opt for preclosure of home loan or not. Just pay the remaining dues and get out of it! That’s simple!
For all others, who don’t consider a home loan, as a disturbing liability and can carry their normal life, along with the Home loan EMIs, there are several other considerations, which they must assess, before making a decision, if they should prepay the loan amount or should they utilize the amount to achieve some other goals of life.
Research on where to invest your lump sum amount: First thing first; if you don’t have a full proof plan over the investment, which can give you a handsome return on your investment, it’s fruitless to invest your lump sum amount and better you should go for the foreclosure of your home loan. Thus, before taking any other factors in consideration, make sure that, what plans do you have, if you decide to continue your home loan as it is, and invest your lump sum amount, for better returns.
Do your own research and get some ways and schemes on where to invest your lump sum. If you couldn’t find any of those schemes, the topic ends with better to opt for the foreclosure of home loan. If you have options available in hand, lets, pay attention at some other factors, which you should look towards before making a final decision.
Allocation of Emergency Funds: If you got a lump sum, don’t go straight towards the prepayment of existing loans. First, let’s analyze your emergency funds. One must always remember that the emergency fund is a crucial part in someone living tension free. The emergency can come without a notice, and thus remaining prepared to meet any such emergency situation, is a must. Allocate some funds in your emergency funds, and then think on your decision either to prepay your existing loan or not!
Prepayment Charges: As per the Reserve Bank of India directive issued in 2012, it directed banks to stop charging foreclosure or prepayment fees and penalties on the customers, if the home loans are availed on the floating rate of interest. Thus, if you are considering the fact that foreclosure or prepayment may attract a penalty, it makes sense to prepay your home loans and get out of it, especially if your home loan is a floating one.
Check your rate of interest type: Are you sure, if you don’t have to bear the prepayment charges as incurred by the bank. If you have any concerns over it, ask your bank over the prepayment terms and conditions and then make a choice of either to go for the Home Loan foreclosure or not!
Tax Benefit: The tax benefit is just the other important aspect, which a person should consider very deeply, before making any decision on prepayment. With every home loan, associated are several tax benefits. Under Section 80C, for every home loan, the principal is considered as investment. While, under Section 24, the interest component is also deducted from the taxable income.
You must keep a fact in mind that under Section 80C, you are liable to get a deduction of INR 1.5 Lacs. While, under Section 24, the deduction allowable is subject to maximum limit of INR 2 Lacs. Thus, before making any decision on the foreclosure of home Loans, just consider this tax benefits aspect with detail and it would be better if you consult your CA, for the same. Do your mathematics; calculate the savings, which you are going to achieve with the continuation of a home loan.
Returns from the lump sum amount you have: Have you considered where will you use the lump sum amount, which you have in hand, in case you opt against foreclosure of your home loan? Are there schemes and investment ways, which can offer you better returns than what you are incurring at your current home loans?
If you made your research on this aspect, just make a comparison, on both the factors. While, at home loans effective rate of interest keeps on decreasing with the decrease in the outstanding loan amount, there are several schemes, which can offer you much higher returns comparatively to the ongoing rate of interest you have to incur. In such condition, let the home loan continue, and invest your lump sum money in those schemes, thus giving you profit.
When you are going to prepay your home loan: This is one factor, which people don’t pay attention at. There are several calculations involved, when it comes to the effective use of the money for your prepayment. First of all, there is a certain lock in period with your home loan, and thus, a person even if decides to prepay a home loan, cannot do so, unless the lock in period collapses. Thus, just check what’s your lock in period for a home loan is. Secondly, if you decide to prepay your home loan, in the early stages of your home loan, it would be a better decision to make, as most of the EMIs in the earlier stages of your loan goes towards payment of your interest rate. Thus, the earlier you prepay your home loan outstanding balance, the better it is.
Other ongoing loans: If you are bearing any other loans with you, it’s better if you decide against prepayment of your home loan and square off the other loans first. The reason is quite obvious; the home Loans are the cheapest loan types available in the market, and any other loans are dearer than the home loan. Thus, it would be a better idea to pay off other costly loans and let the home loans continue for more time.
An eye on lump sum amount: If you decide on progressing ahead with the prepayment on your existing home loan, be aware! It is being said that the Income Tax Dept keeps a keen eye on the prepayment of the home loans and thus can ask you the source of the lump sum amount. Thus, be prepared to furnish the details; if you don’t have any details to furnish, where the amount came from, it’s better if you let the home loan continue as it is and utilize the money for some other purpose!
Know the overdraft facility: There are some banks, which offer their customers with the overdraft facility on home loans. The overdraft facility helps a borrower to maintain liquidity and offer a very helpful option to the existing loan borrowers, with the parking of the surplus money. With the overdraft facility, you can park your surplus money in the home loan and get rid of the worry of prepayment etc sort of things. It acts as an option of taking out that surplus money, in case of need, or else let it be there. Thus, in case you need your lump sum amount in future, take it out and use it for some other purpose. Cross check, from your bank, if they offer such an option to you on your home loan?
The decision to prepay your home loan solely depends on above factors. Since, most of the factors like ‘remaining dues on home loan, the remaining loan tenure, what your investment ideas are, what returns you are going to achieve on those investments and other such’, are better known to you; you are the only one, who can decide whether you should opt for the prepayment of your home loan or else you should opt for the investment at various other sources.
All the people may have their varied opinions on home loan prepayment, it’s only you who can better judge, what factors lies in your favors, and how you can better utilize the lump sum for your benefits. Opt for the Home Loan foreclosure or invest in some schemes with better returns. Options are numerous in the form of investment in equities, investing through mutual funds, and several other traditional investments like purchasing a small home, a plot, or buying any other asset, which can leverage you with the better returns. Analyze your options and decide wisely on the Home Loan prepayment. Home Loan Prepayment can be a good idea and bad idea, depending on how you analyze all above factors mentioned, which must be evaluated very deeply and properly.