5 Things to Consider Before Prepaying Home Loan

While home loan prepayment is a convenient option to close the loan before its tenure, the exercise calls for keeping some essential things in mind. It shouldn’t be a rushed decision and must be taken after considering all aspects. What are these? Let’s find out.

Be Aware About Home Loan Prepayment Rules

Before you prepay a home loan, you must be aware of the prepayment rules. Home loan prepayment rules differ for individuals and non-individuals. Note that when non-individuals procure a home loan, either on the fixed or floating interest rate, and prepay the same, attracts a penalty. When a company or a firm is the borrower or co-borrower of the home loan, they are considered non-individuals.

On the other hand, individuals generally don’t have to pay prepayment penalties towards their home loan, particularly if the loan is procured on a floating rate basis. Hence, it is important for you to be aware of home loan prepayment rules by reading the terms and conditions. In case of any doubt, do seek your lender’s help.

Choose Wisely Between EMI Reduction and Loan Tenure

This is another vital consideration when you are considering prepayment of a home loan. If you choose to reduce your tenure, you can close your loan earlier than the original tenure and also save on interest payments. You can use online home loan prepayment calculators to compute the amount saved on interest if you choose to reduce the tenure.

Note that generally, the tenure gets adjusted, and you have to specifically ask for any change in the EMI amount. Evaluate both options carefully and choose the one that best suits your requirement.

Evaluate the Impact it Has on Tax Savings

Tax saving is an essential aspect of a home loan. The principal and interest both are eligible for tax exemption. However, when you prepay your home loan, it reduces the outstanding principal and subsequently the interest outgo. So, you could miss out on tax savings. Therefore, before home loan prepayment, be mindful of the tax benefits you might have to forgo if you prepay your Home Loan. You can consult an independent and neutral tax professional before making a decision.

Timing of Prepayment

If you are contemplating home loan prepayment, it is best to do so during the initial tenure of the loan when the interest component is high. Doing so and arranging funds for the same at a later stage may not help you maximize the benefit of home loan prepayment to the fullest, as you would have already paid a chunk of the interest.

Hence, timing plays a crucial role. If you prepay later, you can better utilize the funds to invest elsewhere and build a corpus for other life goals.

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