Home loan repayment is a big financial responsibility, and a lot of people opt for prepayment of the loan to pay off the debt as soon as possible. But is it a good practice? What are the things to consider before prepaying? Read on to know more about it.
In India, buying a new home is a significant milestone. And, most people rely on home loan to get the necessary funds for the purchase. Today, while you can easily get the home loan at competitive interest rates, you must carefully plan your finances to ensure timely repayment of the EMIs. If you have surplus funds, you may consider prepaying the loan. But, before you prepay the loan, take note of the following things:
Never use your emergency fund
A lot of people tend to use their emergency fund in their bid to write off the home loan debt earlier than the actual tenure. But, this can be a costly mistake. The primary purpose of an emergency fund is to deal with the contingencies like medical emergency or loss of a job. Using the emergency fund to prepay the loan not only defeats the purpose of the fund, but it may also force you to apply for a loan with a higher interest during an emergency. Hence, you must avoid using the emergency fund for prepayment of the personal loan.
Don’t compensate on your long-term financial goals
Everyone has specific long-term financial goals. Some may save money for their children future expenses like higher education, marriage, etc. while others may save for a secured retirement. Irrespective of the goal, it is crucial that you must be disciplined with your investments to accomplish your goal. Don’t redeem your investments before maturity, and compensate on your long-term goals for early repayment of the home loan.
Carefully choose between loan term and EMI reduction
When you prepay the home loan before the actual tenure, the lenders usually give you two options – you can either reduce the loan tenure or reduce the EMI. Reducing the EMI tenure can immensely help you save on the interest pay out. But your EMI will remain the same. If the high EMI is a burden for you, you can consider reducing the EMI amount. You can use the home loan EMI calculator to know the exact EMI payable after the prepayment.
Be wary of the prepayment charges
As per the lending guidelines issued by the Reserve Bank of India (RBI), the lenders cannot levy prepayment charges on home loans with floating interest rate.
However, for fixed-rate home loans, the lenders can levy a prepayment penalty. The percentage of fees vary from lender to lender, but it is usually in the range of 1% to 2% of the amount prepaid. So, when you prepay the home, consider the prepayment cost.
Consider a home loan balance transfer
An excellent alternative to prepaying the home loan is to opt for a home loan balance transfer. If the high-interest rate is a burden, then this option allows you to transfer the outstanding loan to a different lender who offers a loan at a lower interest rate.
Thus, you can reduce your interest pay out without disturbing your liquid funds, or existing investments. But, before you transfer the loan, make sure to compare the savings with prepayment and balance transfer to make an informed decision.
Prepaying the home loan can help you reduce your debt and interest burden, but it should not be at the cost of compensating your other financial goal or depleting your emergency fund. So, think long and hard before taking any decision.