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Is Early Repayment of Home Loan Worth the Efforts?

  • by Jarrell Marley
  • 27 Days ago
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It is important to have a place, which you can call home and investing in a home is a big decision which takes our life savings. Owning a home is as much of a dream and a matter of pride to give your family their own roof to stay in. Buying a home is a very important decision and needs to be planned fairly well. One key aspect of financial planning is going for a Home Loan. A housing loan acts as an important instrument in achieving our desire of having the house of our own. It is extremely important to choose the home loan provider wisely so that you can make this journey of getting your house hassle-free and will remain eligible to repay the Home Loan amount as and when you find comfortable to repay it. One such option is DHFL Home Loans which give you the facility to repay your Home Loan amount before a stipulated period of time if you get a sufficient amount of money in hand.

DHFL Home Loans have been designed to help you achieve this dream of having a home as they believe that when it comes to getting your own home, nothing should come in the way. Hence, they offer Home Loans on fair terms with total transparency and flexibility during the entire loan period. With the increasing interest rate of Home Loans day by day, many Home Loan borrowers are considering it a good option to prepay their loan so as to incur lower (equated monthly instalment) EMI payments in future. But before making any decision, there are few points that need to be taken care of about home loan prepayment which is described below:

Interest Saving Through Home Loan Prepayment

Many must be wondering what exactly the meaning of prepayment is? So basically prepayment is when you pay an additional amount apart from your regular EMIs on the principal amount of your Home Loan before the stipulated period of time. This reduces the principal outstanding, which in turn lessens your EMIs or your outstanding loan tenure. Typically, banks levy 2-3% charge of the outstanding loan amount, if you prepay your loan amount, or if you are switching lenders in your loan tenure, which is also known as Home Loan Balance Transfer. However, as per the recent notification from National Housing Bank (NHB), going forward, this will not be allowed. There are some prepayment charges applied by banks which need to be clear about before taking a Home Loan from your lender or if prepaying a Home Loan is there in your mind.

Most of the banks allow prepaying the part of your home loan up to a certain limit without levying any extra charges. Some banks such as SBI allow the prepayment if carried out of your own earned income and not by borrowed money, without levying any penalty. There is also an option to partly prepay your loan regularly, suppose in every 3 months, thus reducing your principal outstanding and reducing the amount of interest you will owe the bank. The longer the tenure of the loan, the more the interest you will need to pay, so partly making prepayments are a good way of saving on interest payments. But, if you are prepaying the loan amount above the penalty-free limit and the bank is charging a prepayment fee from you, the two major things should be concerned:

Negotiation

As prepayment charges are not generally fixed, you can negotiate with your lender and if you have good credit score history, you might be lucky enough with a reduced prepayment price or banks may even waive of your fee. If your Home Loan has a lower interest rate than the current rate of interest of Home Loans, then banks would be more flexible to let you prepay your entire Home Loan without charging you additional waive off fees. Also if you are prepaying it from your own pocket rather than borrowing it from someone, then there might be no prepayment charge levied on you, given that it has been more than 3 years since you have taken the loan from the bank.

Calculation

You should be clear about how much interest you will be saving by prepaying your loan amount, to check to see loan amortization and compare this to the prepayment charge you will have to give to the bank. If interest saved is greater in value than the prepayment penalty, it is better to prepay your loan. Sometimes the savings on interest is considerably large that it makes sense to prepay the loan even after paying the prepayment penalty.

Analyzing prepayment against other investments

You should be clear that prepaying your loan will be much more beneficial to you in terms of saving interest rate over the period of time that putting the same money into other investment plans such as equity and mutual funds. After financial calculations, if prepaying the loan is on the heavier side than getting the returns from mutual funds, then it is good to go otherwise you can consider investing money in other financial instruments for greater returns.

Conclusion

Before prepaying any Best Home Loan, be clear to have enough funds left aside as emergency funds. Many people think that prepaying the loan is only beneficial in the initial years of the loan tenure, but this surely is a myth as prepaying the principal amount reduces the burden of paying heavy interests. Definitely prepaying will be more beneficial in the initial years of loan tenure but will be great at all points in the loan tenure. It is better to prepay higher amount loan first in case of more than one Home Loan. Also, people have this mindset of reducing the taxes through a Home Loan, but it is good to remember that it is better to earn more and pay more taxes than earning less just to save on some taxes. Your Home Loan should never exceed 30 to 40% of your take home salary for the healthy and happy life and remember to consider flexibility with your home loans such as one given by DHFL Home Loans where you can prepay the Home Loan amount as and when needed.

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