Prepaying loans can save you a lot of money. Not to mention, it takes away some burden off your shoulders. So, whenever a borrower has surplus funds, it is ideal to prepay your loans. However, it is important to know certain things when it comes to prepaying your home loan, as it is quite different from other types of loans. And since a home loan offers many benefits, prepayment might prove unprofitable under certain circumstances. But done correctly, it can help you save a considerable amount on interest.
So, if you are planning on prepayment of your home loan, here are some factors that you should consider and keep in mind:
Do Not Touch Your Emergency Fund
Your emergency fund’s main purpose is to offer your financial aid in case of an unforeseen financial crisis, such as medical emergencies or unemployment. So, using your emergency fund for prepaying your home loans is not a wise decision and defeats the fund's purpose altogether. Moreover, this can even force you to get new loans, probably at higher rates, during financial emergencies in the future. So, it is advised that you steer clear of your emergency fund and ensure that you always have a well-stocked emergency fund.
Tenure Or EMI?
As a home loan borrower, you have the right to choose between the two critical factors. You can either reduce the number of your monthly EMIs or your loan tenure. While the choice is yours, it is better to reduce the loan tenure as it can offer your greater saving on your interest outgo.
But there are a few things that you need to consider while making the decision. For instance, your monthly income plays a major role in choosing between the two options. And this is the reason why many borrowers might think bringing down their EMI would be a feasible option, as their disposable income would not be burdened this way.
Your Age
Another important aspect that you must consider is your age. The age of the borrower plays a significant role when it comes to the prepayment of a home loan. For instance, if the borrower is nearing retirement age, it is better to consider the preclosure of the loan as earliest as possible as you will have a lot lesser monthly income after your retirement, which will make it difficult to cope with the EMIs. And for self-employed individuals with little to no monthly income, things might be even worse. Moreover, as the borrower gets older, their medical expenses are more likely to increase, which might further make it difficult to make timely payments.
Affect on Your CIBIL Report
A borrower making prepayments of their home loan reflects a sense of financial stability. This means that the person is able to manage their financial obligations in an efficient manner while also balancing their income and healthy lifestyle. But, for this behaviour to help you in the long term, it is important that your lender acknowledges this and sends alerts to you and CIBIL with regard to the prepayments made by you. As CIBIL updates its database every 45 to 60 days from the date of your payment or your lender’s intimation, whichever comes earlier.
So, be sure that you apply for a CIBIL report every three months, which will help you check for all the updates. With a lower home loan obligation, your credit score ensures home loan eligibility for your future loan applications.
Tax Benefits
As a home loan borrower, you are allowed to claim a deduction on principal as well as interest repayments. So, when you prepay your home loan, your principal and subsequent interest reduces. So, it is vital to ensure that you are able to claim tax benefits in other possible ways while you are planning your prepayment. The best way to do this is to strategise your prepayments in advance. This can be done with the help of a prepayment calculator, and this will help you get maximum tax benefits. And all of this can be done along with reducing your principal amount with each payment to a considerable amount.
Check For Investment Options
A home loan prepayment calculator can come in very handy, as mentioned earlier. But it can also be used to check whether the interest you save on your prepayment is more than the earnings you may get from investing the same amount. If the answer is yes, you can go ahead and prepay your home loan. But if not, you might want to consider investing the given amount for better returns.
Conclusion
Home loan prepaying is a prudent decision if done in the right way. All these factors must be kept in mind while thinking of prepayment and foreclosure of your home loan.
