An own house is everyone’s long-lasting dream, and in the quest to fulfil the dream, most of us would end up availing of a home loan which will continue for decades if the maximum tenure of 30 years is chosen. A home loan being humongous in nature will consume most of the monthly income by way of EMI. While availing of the home loan, you would not have realised the implication of long term debt commitment.
A prudent borrower would consider pre-closure of the home loan. You can pre-close the Home Loan either by increasing the EMI and the tenure, part-prepayment whenever surplus fund is available or simply close the loan by paying the entire liability at one go well before the loan’s maturity.
As you move forward in your career, there will be considerable appreciation in the monthly income, and you can consider increasing the monthly EMI to reduce the tenure of the loan. But whichever way of prepayment you choose, there are certain aspects that have to be considered.
Consider these points given below to decide whether or not you should go for a pre-closure of the home loan.
Points to consider before Home Loan Pre-payment
#1. The residual tenure
If you are considering pre-payment to save up on the interest cost, then you should do it in the initial stages of the loan. A major portion of the EMI is adjusted towards the interest during the initial years, and the principal amount will come down with the part prepayments. Pre-payment during the mid or the later stages of the home loan tenure will not benefit you much on interest saving. So, it will be wise to utilise the surplus funds for viable investments.
#2. Age of the borrower
If your age is close to retirement, it is advisable to pre-close the Home Loan before retirement as you will have reduced to nil income post-retirement and will not be able to sustain the burden of continuing home loan EMI. Considering the emergencies that follow as you age and the repercussions of non-payment of EMIs regularly, it is better to be debt-free before retirement.
#3. The utilisation of Emergency Funds
Emergency funds are set aside for several financial goals like a lavish wedding of your children, travel abroad, further studies of your children, medical emergencies, etc. Before contemplating pre-payment, you should check if there are adequate funds to sustain expenses during unforeseen circumstances like being out of a job. Only surplus funds beyond the funds set aside for any emergencies should be utilised for the prepayment.
#4. Tax benefit on home loan
You should consider the various tax benefits that you will be entitled to with a home loan. You can claim deduction on the principal paid under Section 80C of the Income Tax Act 1961 up to a sum of Rs. 1.50 lakhs. If your home is self-occupied, you can claim tax exemption under Section 24(b) of the Income Tax Act 1961 to the tune of Rs. 2.00 lakhs on the interest paid towards the home loan. If you have rented out the house, then there is no limit. You will be deprived of these benefits if you foreclose the home loan account. Instead, you can choose to make part pre-payments which will give you the tax benefit along with saving on the interest outgo.
#5. Cost-Benefit Analysis
Part payments of the home loans with a floating rate of interest are not penalised as per the RBI notification. However, if the home loan is availed at a fixed rate, lenders do charge a penalty that varies with the lenders. For instance, for prepayment of HDFC home loan, a penalty of 2% of the home loan will be charged, depending on the stage at which you are pre-paying the loan.
Also, on pre-payment of the home loan, you will have to forego the tax benefits you will otherwise be entitled to. Before going for a pre-payment factor, the savings you will be making with such a pre-payment vis-a-vis investment in equity for a long period. Do the cost-benefit analysis keeping in mind the annualised benefit of 15% provided by BSE Sensex for the last 15 years.
Procedure for Prepayment Of Loan
- Before making a prepayment or part prepayments, you should keep your loan provider informed about the proceedings to enable them to be prepared for the required rescheduling of the loan.
- If you are an existing customer of HDFC and have availed HDFC Home Loan, you should use the HDFC Home Loan Calculator to arrive at the savings made on the overall cost of the loan by making this prepayment.
- You should then contact the HDFC Home Loan Customer Care and obtain details of the outstanding liability, any other charges to pay, etc., before making the final payment. Also, request for an up to date loan statement, check for any discrepancies before fully clearing the liability.
- Make a list of the original documents submitted to the bank for creating a mortgage of the property. The process of retrieving the original documents on the closure of the home loan account will become easier.
- You should then; place a request for closure of the HDFC Home Loan with the bank along with an id proof and loan statement. Once it is approved, make the payment either through RTGS or via a demand draft.
Suppose you are making part prepayments inform the bank about the same along with a request either to reduce the tenure or to reduce the EMI. If you are making part prepayments to become debt-free as early as possible, then go for a reduction in tenure. If you want to reduce the monthly EMI burden, then go for the reduction in EMI.
Conclusion
Prepayment of a home loan is a good option to reduce the overall interest cost. But do not make the prepayment out of the emergency funds set aside for your financial goals. Liquid funds are required to bail you out of any financial crisis. Instead, you can consider investing the surplus funds in viable products like fixed deposits, bonds or even equity.
