When one takes a home loan, it looks like an uphill financial commitment. Yet, it need not be that way. Remember, a home loan – or any loan, for that matter – is dependent upon its tenure. The longer the tenure, the more you must pay the interest component. In many cases, people end up paying almost double the cost of their home over tenures as long as 25-30 years. This is where prepayment of a home loan can help you save a significant portion of your home loan’s interest.
If you are unaware, prepayment of home loan is the process of paying off your home loan before the end of the loan tenure. It can be done in two ways: either by paying a lump sum amount at once or by increasing the amount of your monthly EMIs. Prepaying your home loan can help you save on interest and reduce your debt burden.
Here are some reasons why part payment of a home loan can prove beneficial for you.
Advantages of Part Payment of Home Loan
- You can reduce the total interest cost
By paying a part of your principal amount in advance, you can lower the outstanding balance of your loan and reduce the interest component of your EMIs. This can help you save a significant amount of money over the course of your loan tenure.
- You can shorten the loan tenure
Another benefit of part payment of home loan is that it can help you finish your loan repayment faster. By paying more than your regular EMIs, you can reduce the number of EMIs left and close your loan sooner. This can give you peace of mind and free up your income for other financial goals.
- You can improve your credit score
Part-payment of a home loan can also have a positive impact on your credit score. By reducing your debt-to-income ratio and showing good repayment behaviour, you can boost your creditworthiness and increase your chances of getting better deals on future loans.
- You can enjoy tax benefits
Part-payment of home loan can also help you avail tax benefits under Income Tax Act Section 80C and Section 24. Here are what the deductions look like under Section 80C and Section 24:
- Section 80C: up to Rs. 1.5 lakh per year
- Section 24: the interest amount paid up to Rs. 2 lakhs per year
However, if you sell your property within five years of taking the loan, the deductions claimed will be reversed and added to your income in the year of sale.
Prepayment of Home Loan: Important Factors to Consider
As you can see, part payment of a home loan can be a smart financial move that can help you save money, time and hassle. However, before you decide to prepay your home loan, you should also consider some factors such as:
- The prepayment charges
Some lenders may charge a penalty for prepaying your home loan before the end of the tenure. This can reduce the benefits of prepayment and increase your cost. Therefore, you should check with your lender about the prepayment charges and terms before making a decision.
- The opportunity cost
Another factor to consider is the opportunity cost of prepaying your home loan. This means the potential returns that you could have earned by investing the money elsewhere instead of paying off your loan. For example, if you have a home loan at an interest rate of 8% per annum and you have an investment opportunity that can give you 12% per annum, it may make more sense to invest the money rather than prepaying your loan. However, this depends on your risk appetite and financial goals.
- The liquidity situation
Finally, you should also consider your liquidity situation before prepaying your home loan. This means how easily you can access cash in case of an emergency or an unexpected expense. By prepaying your home loan, you may reduce your liquid assets and compromise your financial flexibility. Therefore, you should ensure that you have enough savings and contingency funds to meet any unforeseen needs.
Final Thoughts
To sum up, part payment of a home loan can be a beneficial option for borrowers who want to save on interest, shorten their loan tenure and improve their credit score. However, it also involves some trade-offs such as prepayment charges, opportunity cost and liquidity risk. Therefore, you should weigh the pros and cons carefully and make an informed decision based on your financial situation and goals.
All in all, you must plan your finances carefully to make sure that any prepayment of home loan does not impact you adversely. Paying off your home loan early can be a huge relief and will let you focus your finances on other life goals – without worrying about arranging money for home loan interest payments. This is critical since many people enter their middle age when they are some ways through their home loan payments, and one never knows how your age might impact your income, health, etc.
