All of us want to be debt-free as early as possible. Carrying the burden of debt, however big or small, can be overwhelming. That said, prepayment is a potential tool in the arsenal of borrowers that can help them reduce their debt burden significantly.
When it comes to home loans, prepayment can be a convenient option through which you can repay your loan earlier than the actual tenure and be debt-free. However, before choosing it, you must be aware of its pros and cons to make an informed choice. Let’s learn more about the concept of home loan prepayment and its advantages and disadvantages.
What is Home Loan Prepayment?
Home Loan prepayment is a facility through which you can pay, in part or in full, the outstanding principal amount of your home loan. Prepayment of home loans is a facility offered by almost all lenders, subject to certain terms and conditions, and it helps you close a loan before its original tenure.
Advantages of Home Loan Prepayment
Save on Interest
Prepayment of home loans helps you save on interest along with bringing down the loan tenure. The earlier you prepay, the more interest you can save. Hence, if you want to maximize savings on interest payment, make sure to prepay at the beginning of the loan tenure.
You can use online home loan prepayment calculators, available on your lender’s website, to compute the interest saved and reduction in tenure basis the prepayment amount. However, do note that as a standard policy, the loan tenure gets adjusted if any prepayment is made. But, if you wish to make any changes to the EMI amount, it is advisable to contact your lender and make this request.
Focus on Other Commitments and Peace of Mind
When you become debt-free early, you can easily focus on other commitments. You can channelize the money saved as interest for other investments to grow your wealth. At the same time, it gives you peace of mind as the burden of debt is taken off your shoulders.
Disadvantages of Home Loan Prepayment
Missing Out on Tax Benefits
Home loans not only help you accomplish one of the biggest life goals but also help you lower your tax liability. You can claim tax benefits on the principal and interest amount. However, when you prepay your home loan, it brings down the outstanding principal amount and the interest, and you may miss out on tax benefits. Having said that, the benefits largely depend on the tax bracket you fall under and the existing tax laws. To learn more about the tax benefits available on home loans, click .
Paying Prepayment Penalty
Prepayment of home loans may attract a penalty, particularly if it is availed on a fixed interest rate. However, prepayment charges may vary from lender to lender, and you can find more about it in the loan document.
On the other hand, home loans availed on floating interest rates do not attract prepayment charges. But do note that prepayment penalty is a function of a customer being an individual or entity. While individuals don’t pay prepayment penalties, entities do. Hence, it is important to understand home loan prepayment rules well to avoid any surprises later.
Accumulating a Sizeable Prepayment Amount
Accumulating a decent prepayment amount can be a little challenging, particularly when income is under stress. A home loan is a big-ticket commitment and accumulating a sizeable prepayment amount in the initial years of your home loan can be tough. You might need to wait for windfalls in the form of bonuses or maturity of insurance policies to accumulate funds for prepayment which could take considerable years.
The Final Word
While home loan prepayment has its advantages, it’s vital for you to weigh the pros and cons carefully before opting for it. Due diligence will help you make the best out of this option.
Disclaimer: The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision.