If you have taken a home loan, you may be wondering if you should prepay your home loan. Prepayment of a loan means repaying the loan either partially or completely before the due date. While some say that loan prepayment is a good financial decision, paying back housing loans faster than the actual date may incur some costs. So, there are pros and cons to home loan prepayment. With a bonus or a lump sum payment, you can either prepay your home loan or put that money towards other financial goals. This article will explore both the advantages and disadvantages of home loan prepayments so you will be able to make a good decision based on your financial situation and needs.
The Pros and Cons of Home Loan Prepayment
Before making a decision on prepaying housing loans, carefully weigh the pros and cons, which are explored below:
Pros Of Prepaying Home Loans
These are the advantages of home loan prepayments:
- Avoid Defaulting During Bad Financial Times By prepaying a part of your home loan early, you can avoid defaulting on payments in the event of a bad financial situation. If you make a partial or full prepayment on your home loan, you will not have to dip into your savings or other sources of money in case you do not have money for your EMIs for that particular month or months. Large and unforeseen financial responsibilities may come up in the future so if you make a prepayment when you have access to money, it will ensure that you do not default on payments when you are in financial need.
- Shortened Tenure LengthWhen you pay off a part of a home loan, you will be in debt for a shorter amount of time. With a shorter term, you can then focus on other financial commitments instead of focusing only on making your EMI payments.
- Reduces Monthly Financial CommitmentsWhen home loan prepayments are made, the money you will have to pay each month will be less. This will enable you to change your monthly financial planning and instead of paying more as home loan EMIs, you can use more of your monthly salary, for example, on other important expenses.
Cons Of Prepaying Home Loans
These are the disadvantages of home loan prepayments:
- Prepayment PenaltiesThis is perhaps the single largest disadvantage of prepayments on housing loans. If you pay off your home loan early, banks and other lenders will charge you penalties on early payments. This is because lenders make money on interest payments. When you pay off your home loan early, the bank loses money, especially if the interest rate is fixed or if interest rates are going down. A big disadvantage of prepaying a home loan is having to pay fees of 2 to 4% of the amount. This is put in place to protect banks from losing money if customers pay off their housing loans early or switch to another bank.
- Excess Expenses As A Property Owner Once you have made a home loan prepayment, you will have other significant expenses such as property taxes, insurance, annual maintenance costs and more. If you make a home loan prepayment, you have to make sure you are ready to meet these costs.
- Lose Tax BenefitsAnother disadvantage of prepaying housing loans is losing tax breaks. If you live in your own home, you can deduct interest payments up to Rs. 2 lakh in a financial year. If it is your first home, you can take an extra Rs. 50,000 off the interest you pay. You can even get money back if you pay back the principal, up to Rs. 1.5 lakh. If you pay off your home loan in parts, your tax deductions will be lower at the end of the year.
- Less Money For Other Investments If you have access to funds and choose to make a home loan prepayment instead of investing that money, you will lose money that you could have made if you had put that money into securities to make more money. If you choose to make a partial payment on your home loan when you are in a good financial position, you may potentially lose out on investment opportunities that could help you reach your financial goals. With investments like mutual funds, stocks or debt products that have average return rates of 5% to 8%, you may lose the opportunity to earn Rs. 10 lakhs in 10 years, for instance.
- Lower SavingsIt is argued that it is preferable to have a large loan and small savings than a small loan and no savings. When you make a home loan prepayment, your savings will go down or may be depleted. If a situation suddenly arises for which you need money, it is better to have some savings than to make a large down payment on housing loans.
It must be stated that each individual’s financial situation is different. Because of this, carefully consider both options, keeping in mind your financial capabilities and needs before making prepayments on housing loans.
There is no single answer to whether home loan prepayments are good for everyone. It depends on each individual’s financial situation. For example, if the home loan prepayment penalty is less than the amount of interest you will save, then a person may opt for prepayment of housing loans. However, these calculations need to be made keeping in mind that unforeseen expenses can come up at any time. Furthermore, home loan prepayments require a sizable sum.
Before making any decisions, it is a good idea to do some financial research and analysis and figure out how much home loan prepayments will cost. Prepayments on housing loans should only be made if you are confident that it will improve your financial situation. For articles like this one and more, visit Piramal Finance to get information, recommendations and guidance on your financial questions!