5 things to keep in mind before prepaying your home loan

Everyone wants to clear their debts as fast as possible, and the home loan prepayment option is the best choice as it helps reduce the interest paid and gives the mental relief of not having a loan on your head. While prepayment can be a good choice, there are certain things that one should take into account before considering prepayment of their loan: 

Understanding correlation between EMI, loan tenure, and interest on loan

One needs to understand the correlation between Equated Monthly Installment (EMI), loan tenure, and interest paid on a loan, i.e., when a borrower lowers the monthly EMI amount, it leads to an increase in loan tenure, which subsequently leads to more interest paid and vice versa. Thus, borrowers should always make smart choices according to their financial standing. 

Emergency fund is not for prepayment 

An emergency fund is backup saving that everyone keeps for future uncertainties. One should not use this fund for home loan prepayment, as during an emergency, the individual then has to borrow a personal loan, which may come with a higher interest rate. 

Timing is everything 

If a borrower's home loan tenure is 20 to 30 years, they can decide to prepay the loan as it will save the interest paid over the years. The prepayment decision should be taken in the initial years, as that will help in paying less interest. But if the decision is not taken early, it is better to invest additional funds elsewhere and prepay the home loan within a predetermined period. Borrowers can also discuss all such factors with their lenders.

Know all the rules 

It is necessary for borrowers to know all the rules related to the prepayment of home loans. As per the Reserve Bank of India (RBI), people do not have to pay any charge on the prepayment of their home loan availed at a floating rate. However, check all the terms and conditions with your lenders and then decide on loan prepayment.

Don’t liquidate your investments 

Liquidating investments made for retirement planning, children's education, and other major expenses for the prepayment of a home loan can take a toll on your financial health. These investments are made to secure the future; therefore, it is necessary not to use these investments to prepay a home loan.

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