Important Points to Keep in Mind When Deciding to Prepay Your Home Loan

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07 JUNE, 2021

Availing a home loan means committing to repay the huge amount over the years to come. Having surplus of funds in the form of savings, bonuses etc., can enable you to prepay your home loans. A home loan is a long-term credit solution, hence, prepaying it can help you save significantly on your interest outgo. Before you consider making a home loan prepayment, go through some key pointers that you must keep in mind.

Prepaying at the beginning of your loan tenure
Most borrowers opt for a home loan prepayment to lessen the interest burden and repay the outstanding balance ahead of the tenure. When you start paying your consider your home loan EMIs, it is important to note that the first few payments go towards paying off the interest component. Thus, your principal amount doesn’t reduce too much at the start of the tenure. However, by choosing to prepay a lump sum amount, you can decrease the principal amount, in turn, reduce the interest payable. Therefore, it is advised to make the home loan prepayment at the beginning of your tenure to bring down the interest outgo.
Choosing between reduction in tenure or EMI
When you make a partial prepayment, the lender shall allow you to reduce your monthly EMI or the loan tenure. While choosing between these two options, you must carefully analyse your finances. Opting for a lesser loan tenure may seem beneficial, as it shall reduce the interest payable on the balance amount. Whereas a reduced EMI will offer you some breather and promote savings. However, selecting either of them highly depends on your disposable income. In case the interest rates for home loans start increasing, you can choose to reduce your EMI to avoid any financial trouble.
Planning the tax benefits in advance
You can avail tax benefits on the principal as well as the interest component of a home loan. Under Section 80C of the Income Tax Act, you can claim a maximum amount of Rs 1.5 Lakh on principal repayment. For the interest payment, you can claim an amount of Rs 2 Lakh as a deduction under Section 24(B). But if you were to repay your home loan faster, you would lose out on such a tax-saving option. Hence, it is recommended you plan out these things well in advance before decreasing the loan tenure.
Switching lenders for more savings
With the help of home loan prepayment, you can certainly lessen the interest component. But dedicating such a lump sum amount can take a toll on your finances. If you could transfer your home loan to a lower interest rate, it would easily promote more savings. This can be achieved by transferring the balance to a new lender offering an affordable rate. Even a slight change in the interest rate can help you save money in the long run.

With the help of above-mentioned key aspects, you can decide if you should prepay your home loan. Note that, in case you have opted for a floating rate home loan, your lender cannot levy any prepayment charges, however, that is not the case when it comes to a fixed rate home loan. In case of a fixed rate home loan, lenders usually charge a penalty of 2% of the amount being prepaid through refinance.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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