Home Loan Prepayment Key

The large loan amount and the long repayment tenure that extends up to 30 years make a home loan one of the biggest financial commitments for any applicant. Due to these factors, the interest cost on the home loan exceeds the principal amount in most cases. Therefore, many home loan borrowers reduce their overall interest cost by making partial prepayments during the loan repayment period. Considering that most of the lenders offer home loans at floating interest rates, no prepayment penalty is levied on existing borrowers if they make partial or full payments on their home loan.

Home loan borrowers who wish to reduce their debt burden by prepaying their existing home loan fully or partially, should keep the following in mind before opting for home loan prepayment:

EMI or loan tenure

Existing home loan borrowers opting for prepayment have two options – either reduce the EMI component of your loan or reduce your loan tenure. While borrowers can save more on their overall interest cost by reducing their loan tenure, reducing the EMI amount will increase the overall proportion of disposable income for borrowers.

Therefore, the decision to opt for either option will primarily depend on whether the borrower wants to reduce the overall interest cost or the EMI burden for the purpose of making any future investments and expenses. .

balance transfer

Home Loan Balance Transfer (HLBT) facility allows existing borrowers to transfer their existing home loan to a different lender at lower interest rates and/or more favorable terms and conditions.

This facility is especially useful for borrowers with a better credit profile, who can take advantage of the reduced interest rate regime to avail home loans at lower interest rates.

Exercising the HLBT option reduces the overall interest payment for the borrower, without negatively affecting their liquidity or their ongoing investments.

Home loan borrowers should account for the projected overall savings using the balance transfer facility before opting to transfer their existing loan to another lender.

Existing borrowers who wish to transfer their home loan to other banks or housing finance companies (HFCs) can also consider the home loan overdraft option – a home loan variant – if it is offered by the new lender. Under this type, an overdraft account in the form of a savings or current account is opened and linked to the home loan account.

Home loan borrowers can deposit their surplus money in this overdraft account, from which they can withdraw partially or fully at a later date in case of future monetary requirements or shortfall of funds.

The balance in the overdraft account is deducted from the outstanding home loan amount while computing the interest component. Thus, the home loan overdraft facility offers the twin benefits of loan prepayment and readily available liquidity to its borrowers.

emergency fund

Emergency fund to meet unavoidable expenses such as ongoing EMIs, rent, insurance premiums and tuition fees for children and/or to meet unavoidable expenses during the period of loss of income due to unemployment, illness or disability are created.

The emergency fund should ideally be large enough to cover any unavoidable expenses for at least 6 months.

Home loan borrowers who use their emergency funds or sell properties to prepay loans may find them sub-optimal to their existing investments to tide over adverse financial situations or to avail future loans at very high interest rates. Prices may have to be redeemed.

Many home loan borrowers liquidate their existing investments earmarked for important financial goals to prepay the home loan.

However, doing so may adversely affect their liquidity and long-term financial health, besides forcing them to take costly loans in future only to meet those financial obligations.

factor in returns

Although home loan interest rates are among the lowest among retail loan products, they typically exceed the returns generated by most fixed-income instruments.

So, if home loan borrowers have kept their surplus funds in fixed income products like fixed deposits, short term debt funds, which are not earmarked for any significant financial goal, they can use them to prepay their existing home loan. Can be used. However, the same strategy may not be applicable in case of equity investment.

Since the long-term returns generated from equity investments are usually much higher than home loan interest rates, one should avoid encashing their equity funds to prepay the home loan.

(The writer is Head of Home Loans, Paisabazaar)