A home loan can pose a significant liability for several individuals who acquire the credits to own a house of their own. With the average ticket size of a home loan increasing to more than Rs.26 lakh according to a report of 2020, it is evident that the ensuing burden for borrowers can be substantial. To tackle this burden, many borrowers opt for the facility of home loan prepayment.
Partial prepayments are a good option for sequentially bringing down the overall loan repayment burden, as they help reduce the principal amount and interest. However, individuals must be careful while making prepayments to ensure maximum savings, reduce the home loan tenor, and establish a more concrete financial foothold.
Illustrated below are some critical points which must be taken into consideration before prepaying a home loan –
Home Loan Tax Benefit
The Government of India extends several tax benefits on home loans to encourage more individuals to invest in India’s real estate sector. An individual can claim an exemption of up to Rs.1.5 lakh every financial year on the home loan principal repayment under Section 80C of the ITA, 1961.
If a borrower acquires a home loan for a self-occupied house, he/she can avail tax exemptions up to a maximum of Rs.2 lakh on the interest paid on the loan. The above tax benefits won’t be applicable in case of full prepayment. Hence it is vital to consider these benefits before making a home loan prepayment.
Loan Repayment Stage
Home loan prepayment helps borrowers save on the interest, and the magnitude of the savings made depends on the loan prepayment stage. Prepaying a home loan in the latter stages does not yield substantial savings on the interest for the borrower. This is because the interest component in the home loan EMI is higher during the initial stages of repayment.
Therefore, in such cases, unless one wants to acquire another loan and increase their eligibility, it is impractical to invest surplus funds towards foreclosure or home loan prepayment.
Ensure that Prepayments Reflect in the CIBIL Report
Making home loan prepayments indicates an individual’s financial health. It implies that the individual is efficiently tackling the existing financial obligations. Borrowers must be vigilant regarding the acknowledgements which the lender sends them and CIBIL regarding their prepayments.
One must look for updates by checking the CIBIL score at least once in three months. A positive implication on the credit score and an enhancement in a borrower’s creditworthiness occurs due to the lowered home loan obligation.
The creditworthiness of a borrower is also strengthened by being punctual towards EMI payments. A responsible borrower, in turn, becomes eligible for several perks from financial institutions.
For instance, financial institutions provide pre-approved offers, which help in simplifying and accelerating a loan application process. These offers are provided on various financial products like home loans, loans against property, and more. You can check your pre-approved offer by providing a few details such as your name and contact number.
Opting for a Lender who does not Levy Charges on Prepayment
Unlike borrowers, lenders generally experience losses when it comes to prepayments. Therefore, they might charge a certain amount from the borrowers as prepayment fees. Usually, charges are not levied on loans with a floating interest rate.
Hence, one must opt for a lender that levies nominal charges on home loan prepayment against a fixed rate of interest.
If you are willing to become a homeowner and are pondering over the aspects of prepayment and loan foreclosure before acquiring a home loan, it can be a sound move on your part. The next factor that would help you make an informed decision in this regard is calculating the EMIs beforehand using a home loan calculator.
With this factor into consideration, making a home loan prepayment can become extremely simple.