The Do’s and Don’ts of Home Loan Prepayment

A Home Loan is a long-term investment. The repayment of the EMIs (Equated Monthly Instalments) can stretch up to 30 years in some cases. You can receive an unexpected bonus or inheritance. You can get a promotion or switch over to a new job that pays your more. In short, you have additional cash on hand. Can you prepay the Home Loan and free yourself from your loan obligations? It is the first thought that comes to your mind. Before you consider Home Loan Prepayment, ask yourself these questions:

• How old is my Home Loan?
• What is the rate of interest?
• How much is my savings in tax?
• Can I get a better return if I invest the surplus amount elsewhere?

Do’s

1. Do your research well while choosing the loan

The research is a crucial element during the initial stages of choosing the right Home Loan. Check out lenders and products that do not charge any prepayment penalty. The Reserve Bank of India has made it mandatory for banks and other financial institutions not to charge any prepayment penalty on floating rate Home Loans. Choosing the right product is essential.

2. Pay steady EMIs

The floating rate entails that the rate of interest keeps changing frequently. The banks have the option of either increasing/decreasing your EMI or extending/reducing the loan tenure. Choose for paying steady EMIs. In this way, you will have control over your monthly budget.

3. Prepay in the early stages of the Home Loan

The primary objective of making a prepayment is to reduce the interest burden. The design of the Home Loan EMI is such that a significant part of the EMI goes towards repaying the interest in the early stages. Therefore, the earlier you make the prepayment, the more the interest you save.

4. Keep your documents ready while making the prepayment

When you make the prepayment, the bank would need to check your identity documents. Keep them ready. Take your checkbooks along with you. The bank might ask you to pay simple interest for the month towards which you make the prepayment of the principal amount.

5. Calculate the benefits of making a prepayment

Before you make the prepayment of the Home Loan, calculate whether it is worth making the prepayment. The rate of interest on the Home Loan is around 9%. Factor the tax benefits you get on the repayment of the Home Loan. Are there investment options in the market that fetch you a higher return? Calculate the benefits before you go ahead with the prepayment.

Don’ts

1. Do not overlook the tax benefits

Repayment of your Home Loans entitles you to concession in income tax. A significant part of the concession is towards compensation of the interest component. In making the prepayment, you reduce your interest burden. Are you reducing your tax benefits as well? Do not overlook this aspect while you proceed with the Home Loan prepayment.

2. Do not prepay the entire loan

Making a part prepayment is better than making closing the entire loan. You have some liquid funds on hand to cater to an emergency. You can also invest the amount in investments that give better yield. These factors come into play during the later stages of the Home Loan tenure. In the later stages, a higher portion of your EMI goes towards repaying the principal amount.

3. Do not forget to collect your unused check books

In case you close your loan account prematurely, do not forget to collect the unused checkbooks from the bank. It is a precautionary measure to avoid any misuse of the checks.

4. Do not forget to collect the acknowledgment from the bank

Get an acknowledgment when you make the prepayment of the Home Loan as a proof of having made the payment. The receipt should mention the principal outstanding after the advance payment. It should also mention the remaining tenure of your Home Loan. Ensure that the bank official signs the letter and affixes the bank seal.

Making a prepayment of the Home Loan is an excellent way of reducing your liability. It is a safe way of getting assured returns. However, investing the funds in an alternative instrument that gives better yield is a better option. Making Home Loan prepayment is an attractive proposition today because there are no prepayment penalties. Now, you know the dos and don’ts of making a home loan prepayment. Consider these points and choose your options wisely.