7 MinsDec 7, 2021
A house serves a basic need, i.e. a place to stay. In addition, it also provides a sense of financial security because its value increases over time, in most cases. Plus, a home loan offers tax benefits to borrowers. Not to mention the emotional
value of owning your own home. These are some reasons why most people are willing to invest in a house and commit to a long-term home loan. However, it could at times prove sensible to partly prepay your home loan and become debt-free.
Before you decide whether to prepay your home loan or not, consider the following aspects:
1. The rate of interest
The rate of interest you are currently paying on the home loan ought to be relatively competitive and should not
stress you financially. If you can save on the interest outgo, then it makes sense to prepay the home loan. After all, a penny saved is a penny earned!
2. Other loans
If you have any other outstanding loan viz. personal loan, credit card dues, etc. it makes sense to partly or fully prepay those first since they attract a higher interest rate
compared to your Home Loan.
3. The remaining tenure of your home loan
Check how many months or years are remaining before your home loan tenure officially ends. The longer the residual tenure of your home loan, higher will be the total interest amount payable. In such a case, prepaying the home loan would be worthwhile
and more so when interest rates in the economy are about to increase.
On the other hand, if there are only a few years or months for the tenure to end and interest rates are expected to remain stable; prepaying the Home Loan may not make
much sense. The main benefit should be evident from the interest outgo that possibly can be saved during the remaining tenure of the loan.
4. The EMI burden
When buying your dream home, many of you may stretch your budget in the assumption that your income will grow in future and you would be able to repay higher EMIs easily. But in the case of an unprecedented event such as job loss or a pay cut,
the EMI on the home loan (and other loans) may turn to be a burden. If case of such a situation, pre-paying the home loan could prove to be a challenge.
But if you are earning a good income and receiving annual increments; it makes sense to save and partly prepay your home loan thereby reducing your debt burden. Ideally, your total EMIs on loan should not exceed 40-50% of your Net Take Home (NTH)
pay.
[Also Read: What Type of Home Loan is the Best One for You?]
5. Impact on tax planning
The principal component of the home loan EMI can be claimed as a deduction under Section 80C up to a sum of Rs 1.50 lakh per financial year. The interest up to 2 lakh can be availed as deduction under Section 24(b) if it is a Self-Occupied Property
(SOP under Section 24(b)).
Therefore, you need to assess the tax benefit you would stand to lose if you were to partly prepay the home loan. Use Axis Bank’s Home Loan Tax Saving Calculator to
get a sense of the income tax benefit you will be able to get against a home loan.
6. How much can you earn by investing the money saved
The overall cost of partly prepaying the home loan should also be weighed against the returns that you can potentially earn by investing the money saved. If there is an opportunity to earn a higher return (post-tax), compared to the interest on
the home loan you are paying, and the interest rates are likely to move up; then prepayment may prove beneficial provided the remaining loan tenure is long.
On the other hand, if you are nearing the official end of your home loan tenure, interest rates are likely to remain steady, and there aren’t any attractive investment opportunities; then prepaying the loan would be futile, as you would
also lose out on the tax benefit.
7. Your other financial goals
A house is just one financial goal among many others, such as planning for your child’s education and wedding expenses, a family vacation, a car, retirement and so on. You need to allocate money to meet all these goals. Hence, avoid compromising
on the other goals to prepay your home loan.
Consider this example. Say, you have an existing home loan of Rs 50 lakh taken for a self-occupied property, paying interest @8.0% p.a., the tenure of the loan is 25 years, and you decide to pay Rs 3 lakh every three years. This will be the result…
| Loan (in Rs) | 50 lakh |
| Tenure | 25 years |
| Interest Rate p.a. | 8.00% |
| Prepayment every 3 years (in Rs) | 3 lakh |
| Total Prepayment (in Rs) | 15 lakh |
| | |
| The Result: | 15 lakh |
| The loan tenure stands reduced to | 16 years |
| Interest Saved (in Rs) in 16 years (approx.) | 25 lakh |
| Total EMI (in Rs) in 16 years (approx.) | 74 lakh |
| Total Interest (in Rs) in 16 years (approx.) | 41 lakh |
| Total Principal (in Rs) in 16 years (approx.) | 33 lakh |
| Total Principal repayment, including prepayments (approx.) | 48 lakh |
Assumption: Interest rates remain unaltered throughout the tenure of the loan (For illustration purpose only)
You would effectively reduce the tenure of the loan by 9 years and save interest outgo of approximately Rs 25 lakh.
QuikPay Home Loan
There are some home loans which have features similar to part prepayment in-built in the product. QuikPay Home Loan from Axis Bank is one such
product, which will enable you to save a substantial amount as interest outgo. Compared to a typical or regular home loan, under QuikPay Home Loan, you repay the loan faster and the total interest paid during the loan tenure is reduced.
QuikPay Home Loan offers an alternative repayment structure, where you repay an equal amount of the principal, i.e. a fixed amount every month along with interest on the outstanding balance. Thus, the equated fixed principal amount combined with the
reducing interest amount of your home loan results in a reduction of monthly instalments over the tenure of your home loan.
Considering the same example, where you have an existing home loan of Rs 75 lakh, paying interest @8.0% p.a., and the loan tenure is 25 years; with a QuikPay Home Loan, you can approximately save Rs 23.41 lakh on interest payment. To use Axis Bank’s
QuikPay Home Loan Calculator and know your repayment schedule, click here.
If you have a regular home loan from any other bank, consider a home loan transfer to Axis Bank opting for the QuikPay Home Loan. Going forward even if the interest rates on home loans increase, you will stand to benefit from Axis Bank’s QuikPay
Home Loan as opposed to a regular home loan.
Are there any charges for part prepayment of your home loan?
The present rules of the RBI mandate that no charge can be levied by the bank on part-prepayment and foreclosure of a Floating Rate Home Loan.
However, if your loan is a Fixed Rate Home Loan, a prepayment penalty of approximately 2% is
levied by the bank.
When you are deciding on partly prepaying the home loan, weigh all the aspects very carefully. Ultimately the benefit should outweigh the cost of part prepayment.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
