Home Loan: Is prepaying your home loan a smart idea?

When it comes to home loan repayment, borrowers have two options. They can either return the loan amount in Equated Monthly Instalments (EMIs) or they can prepay their loan. Prepayment of a home loan can be a good idea if one has surplus funds. It can reduce the amount to be paid back and lower debt. But there are certain tax deductions a person will have to forgo if they opt for prepayment of a home loan. Take a look at the pros and cons of prepaying a home loan and if it is a viable option.

What does prepayment of home loan entail?

Prepaying a home loan means you can use any surplus funds you have to repay the money (in full or partially) before the end of the loan tenure.  It can reduce debt burden and lead to the tenure getting shorter if significant money is invested.

What are the factors you should consider before prepaying your home loan?

Tenure left: When it comes to home loan, it is better to make additional payments early on. This will reduce the burden of debt in the long run. This is because the additional payments would go towards the principal loan amount, rather than the interest. This means the interest amount for the coming months would be lowered on the basis of a reduction in the outstanding loan.

Rate of interest: If the bank is charging a high rate of interest, it might be a good idea to prepay your home loan. This will lower the debt you owe to the bank.

Source of surplus funds: Another factor to keep in mind is the source of your surplus funds. Exhausting savings or emergency funds to prepay your home loan is not a good idea. The move will leave you extremely vulnerable to any financial crises. It can also lower the amount available for you for investment.

What are the disadvantages of prepaying your home loan?

If you prepay your home loan later in the tenure, the benefits will not be much. Apart from that, borrowers may miss out on tax deductions of up to Rs 1.5 lakh under Section 80C. Additionally, there is an exemption of up to Rs 2 lakh on interest paid on home loan. These deductions will not be valid in case of prepayment.

Prepaying home loan: Good or bad?

Prepayment of a home loan has a number of advantages, but only if the timing of the additional payments is right. If one is willing to leave tax deductions for home loans, prepayment can be a good choice for a borrower. However, they should consider their financial needs and goals first before opting for additional payments.