Article

The Dos and Don’ts of Home Loan Prepayment

07 Aug 2019

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The repayment of any long term loan, including home loans, can become a hindrance in achieving your financial goals. Therefore, it is in your best interest to repay the home loan, as it reduces the burden of debt and stops cutting into your savings. For most of us, as soon as we receive any windfall, bonus or maturity lump sum, the first obvious thought is to pay off your home loan amount. But prepayment of home loan is not as easy as it sounds. There are some points that you should consider before giving yourself the satisfaction of owning your property.

Know Your Loan

Banks offer different loans for different kinds of financial needs. Hence, before taking your loan it is better to map out your needs and decide on an amount that will be feasible financially i.e. an amount that you know you can pay without hassles in the future.

Keep that Tax Benefit in Mind

Even though you might be in a hurry to get rid of that home loan, don’t forget that it allows you to save on taxes. The principal portion of the EMI paid for the year is allowed as deduction u/s 80C, the maximum limit is Rs1,50,000. Section 24B allows deduction of home loan interest up to Rs2,00,000. There is more deduction available under home loan subject to certain conditions.

 So, if you pay off your home loan entirely, you might end up losing on your tax savings. Assess your situation and decide whether you should pay off your loans in part or in whole.

Make a Systematic Repayment Plan

The main benefit of paying your loan early is that you can cut back on your interest payments. If you keep paying your loan until the end of the projected payment plan of your loan company, you will end up paying a substantial amount of interest payments. Hence, your main aim should be to start repaying your loan as early as you can, to save on interest payments.

Whenever you decide to repay your home loan, the loan company gives you two options regarding your EMI payments – you can either decrease your EMI amount and keep the tenure same or decrease your loan tenure and keep the EMI same. You should carefully consider all your financial plans before deciding on any of these options.

Understanding the EMI Burden

Since you have been paying your EMIs for quite some time now, you have a fair idea about how much it cuts into your monthly finances. If your EMI does not amount to much into your monthly budget, it is not such a hurdle. However, if it’s putting a dent in your monthly finances, it is better to pay it off soon before it hampers your financial future.

Prepayment of Funds

Though it is smart to repay your loan quickly, it is not smart to repay that loan using funds that are marked for crucial needs like children’s education, insurance needs, health care, retirement etc. Therefore, consider prepayment from funds that can be counted as surplus.

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The Dos and Don’ts of Home Loan Prepayment

07 Aug 2019

Untitled Document Untitled Document

The repayment of any long term loan, including home loans, can become a hindrance in achieving your financial goals. Therefore, it is in your best interest to repay the home loan, as it reduces the burden of debt and stops cutting into your savings. For most of us, as soon as we receive any windfall, bonus or maturity lump sum, the first obvious thought is to pay off your home loan amount. But prepayment of home loan is not as easy as it sounds. There are some points that you should consider before giving yourself the satisfaction of owning your property.

Know Your Loan

Banks offer different loans for different kinds of financial needs. Hence, before taking your loan it is better to map out your needs and decide on an amount that will be feasible financially i.e. an amount that you know you can pay without hassles in the future.

Keep that Tax Benefit in Mind

Even though you might be in a hurry to get rid of that home loan, don’t forget that it allows you to save on taxes. The principal portion of the EMI paid for the year is allowed as deduction u/s 80C, the maximum limit is Rs1,50,000. Section 24B allows deduction of home loan interest up to Rs2,00,000. There is more deduction available under home loan subject to certain conditions.

 So, if you pay off your home loan entirely, you might end up losing on your tax savings. Assess your situation and decide whether you should pay off your loans in part or in whole.

Make a Systematic Repayment Plan

The main benefit of paying your loan early is that you can cut back on your interest payments. If you keep paying your loan until the end of the projected payment plan of your loan company, you will end up paying a substantial amount of interest payments. Hence, your main aim should be to start repaying your loan as early as you can, to save on interest payments.

Whenever you decide to repay your home loan, the loan company gives you two options regarding your EMI payments – you can either decrease your EMI amount and keep the tenure same or decrease your loan tenure and keep the EMI same. You should carefully consider all your financial plans before deciding on any of these options.

Understanding the EMI Burden

Since you have been paying your EMIs for quite some time now, you have a fair idea about how much it cuts into your monthly finances. If your EMI does not amount to much into your monthly budget, it is not such a hurdle. However, if it’s putting a dent in your monthly finances, it is better to pay it off soon before it hampers your financial future.

Prepayment of Funds

Though it is smart to repay your loan quickly, it is not smart to repay that loan using funds that are marked for crucial needs like children’s education, insurance needs, health care, retirement etc. Therefore, consider prepayment from funds that can be counted as surplus.