A home loan is a long-term commitment, and thus the interest outgo towards the payment of home loan puts a significant burden on the borrower’s pocket. It is because of the same reason that borrowers opt to repay the loan before the tenure of the loan. The question, however, is should a borrower always prepay the home loan if they have surplus funds or are there certain circumstances under which one must avoid prepayment of home loan.
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These are some of the factors that one must consider before deciding about home loan payment.
- Analyzing financial requirements: Before deciding about utilizing your surplus money to prepay the loan amount, you must examine the current financial obligations. If you have enough funds for a medical emergency and everyday household activities, you can prepay the loan. However, it would not be a wise day to prepay the loan if you don’t have enough liquid funds.
- Age: Age is an essential factor to decide about home loan prepayment. If you have reached near the age of retirement, you must prepay the loan because it would become challenging to make the home loan payment when you don’t have a source of income. Also, the need for funds for emergencies rises in the retirement phase. Thus you must repay the loan before retirement.
- Stage of home loan: The EMI component of home loan is significantly higher in the initial stages of tenure of the loan. Thus, if you have ample funds to prepay the loan in those stages, you can save a lot of money. On the contrary, you would not be able to have substantial savings in the later stage of a home loan as EMI is low.
- Home Loan Tax Benefits: There are various home loan tax benefits available to home loan borrowers. Under Sec 24 C of the Income Tax Act, you can get tax deductions upto Rs. 2 Lakhs on the home loan interest. Also, you can save taxes upto Rs—1.5 Lakhs on the principal component of home loan. Additionally, borrowers can also avail home loan tax benefits on stamp duty and registration charges of house.
- Investment of money: The surplus money can also be used for investment in various investment schemes such as PPF, Mutual Funds etc. Thus, it is significant that you weigh down the pros and cons of prepayment and investment based on your financial goals, current financial scenario etc.
- Prepayment Charges: Banks and Non- Banking Financial Institutions also charge a penalty fee in case you decide to prepay the home loan. It is thus crucial that the cost of prepayment charges does not exceed the savings of interest outgo when you prepay the home loan.
Salient points for consideration to prepay the home loan in COVID 19
- The economic crisis in the past, along with the predictability of recession in the economy in the future demands that you have an emergency kit ready for any unforeseen circumstances.
- In such a scenario, thus it would not be a good idea to use your surplus money to prepay the home loan.
- If you have enough liquidity in your hands, you can utilize a part of your savings for prepayment, and the remaining can be invested in investment schemes as per your investment goal.
Conclusion: The prepayment of a home loan significantly reduces a considerable burden. However, it is important to weigh down the benefits of utilizing those surplus funds in different schemes given that the borrower can also tax benefits on a home loan.
Summary: Things you must know about Home Loan Payment.
A home loan is a long-term commitment, and thus the interest outgo towards the payment of home loan puts a significant burden on the borrower’s pocket. It is because of the same reason that borrowers opt to repay the loan before the tenure of the loan. The question, however, is should a borrower always prepay the home loan if they have surplus funds.
Factors one must consider before deciding about home loan payment.
- If you have enough funds for a medical emergency and everyday household activities, you can prepay the loan. However, it would not be a wise day to prepay the loan if you don’t have enough liquid funds.
- If you have reached near the age of retirement, you must prepay the loan because it would become challenging to make the home loan payment when you don’t have a source of income.
- The EMI component of home loan is significantly higher in the initial stages of tenure of the loan. Thus, if you have ample funds to prepay the loan in those stages, you can save a lot of money.
- There are various home loan tax benefits available to home loan borrowers on home loan interest and principal amount of home loan.
- It is significant that you weigh down the pros and cons of prepayment and investment based on your financial goals, current financial scenario etc.
- It is crucial that the cost of prepayment charges does not exceed the savings of interest outgo when you prepay the home loan.