Money For Lunch – Pros and Cons of Home Loan Prepayment

Pros and Cons of Home Loan Prepayment

June 30, 2016 8:34 AM0 commentsViews: 26

If you have a home loan, chances are that you would be interested in clearing it off as soon as possible. The reason is that longer you allow the loan to run, more will be the total interest outgo. So earlier you pay, higher will be your savings.

Home loan repayment has become popular these days as people have rising incomes, which allows them to prepay their loans. So let’s see what are the pros and cons of home loan repayment.

Pros

  • The most obvious benefit of home loan repayment is that your interest payout reduces. The outstanding principal on the home loan is reduced and this results in less interest being accrued on the loan account.
  • You also free up your credit limit and can even consider taking other loans (home or other) if you have a need.
  • Once you have repaid the loan, you can consider using the money saved by not paying EMIs to invest in other alternative investment avenues.
  • You get back ownership of the property, which was earlier mortgaged with the lender.

Cons

  • You will have to bear the cost of pre-payment charges if that is applicable to your type of home loan. Though percentage of penalty varies from lender to lender, it can still come out as a large amount of the outstanding amount was a big one.
  • Since you get tax benefits on the interest component, repaying your loan will mean that you will lose the future tax benefits that you were availing till now.
  • Repaying your home loan means that you will have to part with a lot of cash that was available with you. This can drastically reduce your liquidity. If you do not have adequate financial buffer, then you can get in trouble in case of financial emergencies.
  • Nowadays, banks also offer schemes which offer the added advantage of withdrawing surplus amount from your loan amount if you need it for an emergency. However, if you opt for this, it might overshadow the advantage of having paid the additional amount.

After weighing all pros and cons, if you opt in for a pre-payment, then below are the tips you must keep in mind –

  1. Pay Consistent EMIs – To ensure that prepaying a loan works to your benefit, keep your EMIs  unchanged.
  2. Prepay As Early as you Can – The main objective behind a loan prepayment is to reduce the  amount  of interest. Most of the loans are designed in a way that the initial EMIs go towards the  interest  component. Hence, the earlier you make a prepayment, the more interest you get to save.
  3.  Calculate the Benefits – Before making any quick decisions, it’s advisable to calculate the returns    that can be made from the same amount if invested elsewhere and compare it with the interest  amount of the Home Loan
  4. Don’t prepay the entire sum – Opt in for a partial prepayment if the amount for which interest is  being paid is less than what the funds would yield when invested in other financial instruments  with assured returns

These are some of the major pros and cons of repaying your home loan. But please note that it eventually boils down to an individual’s unique financial situation so as to decide whether to repay the loan or not.

 

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