Home loan prepayment can be understood as the early repayment of a home loan by a borrower. This can be done in part or sometimes full repayment. It is done in order to avail lower interest rates by the means of optional refinancing. Also, it is sometimes possible that the borrower secures enough money and can try to make the full payment earlier than expected. But is it better to invest that money somewhere else or is early repayment a better option?
According to financebuddha.com, home loan pre-payment refers to nothing but paying your full or half due earlier than the tenure. Most of the home loans are around 10 years and considered to be one of the best investments. In case you plan to close this before the schedule then you must inform the bank or the financial institution or organisation in writing.
Almost all of the housing finance companies and banks charge a prepayment penalty usually if the loan is paid off before the tenure completes. Some of the banks do not allow this if you manage to establish the funds to put in for the pre-payment.
Prepayment penalties on home Loans
Banks are forbidden from collecting prepayment penalty anymore on floating rates of loan, this is as per the new rules mentioned by Reserve bank of India.
You don’t have to pay anymore penalty. That is a huge leap forward for the home loan borrowers and consumer welfare if your bank still charges you for a pre-payment penalty; you are eligible to lodge a complaint.
The need for home loan prepayment
Home Loan Prepayment is a good idea because it ends up eating a lot of money in the name of interest. It is not good for your own financial health to give away a big chunk of money as a home loan. There is Home Loan tenure for each and every loan that is passed. Borrowers prefer prepayment in order to clear off their debt when they get a big chunk of money either in the form of an annual bonus, money from matured investments or any other form. Prepayment of home loan is needed in most cases because it leads to an increase in the overall cost of property.
While Home loans are handy, they end up eating a lot of money in the name of interest.
However, there are scenarios where continuing with home loan can be beneficial as well. Let us have a look at all the possible scenarios so that it becomes easy for you to decide whether or not should you be going for a prepayment and/or a pre-closure.
When should you go for a home loan pre-payment?
First thing, a customer can save a lot of money on interest by making a pre-payment of their home loan before the tenure. This is obviously the best pro for prepayment of the home loan.
Paying the entire amount early in the loan tenure so you can take the advantage of foregoing less on interest is the trick. Even at a later stage in the tenure, where customer has paid much of the interest,
If he or she has an excess of cash, it is always a good practice to prepay the loan and get some money off your back.
When should you not go for a pre-payment?
In the case where a home loan is not being a burden on your head, it is sometimes beneficial to continue with the regular EMI schedule. This needs to be brought up as there are tax benefits which home loan offers.
In another case, suppose of prepaying the whole amount, you invest the money somewhere else, let’s say mutual funds, which will also help you earn returns over years.
Consider other options before you prepay
Sometimes it is advisable to invest the money you would be investing to prepay, somewhere else, such as a mutual fund or a business which might earn you more in the long term. You obviously save the interest money, but you can earn more than the amount you are saving from the interest money by putting it elsewhere. Being smart and making smart and intelligent choices where home loans are concerned is very important if you want to avoid the long-term difficulties and issues.
Don’t make a hasty decision
Hasty decisions never did any good for anyone. Making a hasty decision would overlook the cons of prepaying the loan and that could adversely affect you.
Don’t borrow another loan
It is quite common where you see people getting under a burden of another loan to pay the previous one, this makes you fall under a never ending cycle and web of constant payments and that can spoil your CIBIL score as well.
Don’t put up all the money to prepay the loan
Putting all the money to prepay the entire amount would add up more to your financial stress, you sure have to take care of other aspects and keep yourself financially healthy, again this focuses on the first “don’ts” which asks you not to make any decision in haste. Sometimes, it is more beneficial to prepay only half or parts of the principal amount than paying everything in one go.