It’s possible to regard borrowing money to buy a house as a two-edged sword. It helps you accumulate more assets, but it also raises your liabilities. Ironically, all borrowers dislike having debt. Therefore, anytime a borrower has extra cash, their first inclination is typical to prepay a loan. Prepayments can be made on all or a portion of the home loan. But because a home loan offers so many tax advantages, it’s important to take a few things into account before deciding to prepay the loan.
Prepaying your housing loan will lower your interest costs, but it will also deplete your liquid assets, which could have been used to cover urgent financial needs or unexpected medical costs. Therefore, before making a home loan prepayment, confirm that you have sufficient liquid assets to satisfy both your immediate financial demands as well as any unforeseen medical or living expenses that may result from a complex situation.
The government provides a number of tax benefits on home loans in India in an effort to get more people to engage in the country’s real estate market. Under Section 80C of the Income Tax Act of 1961, you are eligible for an annual tax exemption of up to Rs. 1.5 lakh on the principal of your home loan repayment. Additionally, Section 24(b) of the Income Tax Act allows you to get a tax exemption of up to Rs. 2 lakh on the interest paid on house loans acquired for self-occupied homes; there is no limit for non-self-occupied homes. If you fully prepay your home loan, you won’t be eligible for the aforementioned tax advantages. Therefore, think about the tax advantages before paying off your housing loan early.
The ideal time in the tenure
Home loan prepayments lower the amount of interest that is applied to the principle. Prepayment should be paid in the first few years of the loan term because interest payments are greater during this time. You can forfeit the advantages if the prepayment is made later in the process.
Age of the borrower
Before prepaying your home loan, it’s crucial to keep your age in mind. It is advisable to pay off your loan as quickly as you can if you are close to retiring. This is due to the fact that you won’t have a lot of money left over once you retire to pay off debt. Additionally, as you age, your medical costs will definitely increase as well, raising your chance of defaulting on a loan. To avoid this, it is advisable to pay off all of your outstanding bills as soon as you can.
Returns from investment
You can invest whatever extra money you have left over after paying off your house loan in full. The profitability of both options, your current financial situation, your capacity for risk, and other factors must all be taken into account before deciding whether to prepay your loan or invest to generate larger returns.
When should you invest?
- It wouldn’t be a good idea to prepay your housing loan with all of your savings and extra money during a recession like COVID 19. Instead, you need to keep as much of your savings and liquid assets as you can. In this situation, borrowers must divide their funds among several investment options in order to build wealth for the future.
- In the alternative, you might use a portion of your surplus funds to part prepay your loan while using the remaining funds to make investments in line with your investing strategy. By doing this, you can lessen your debt load while growing your money in a variety of ways.
- As was previously indicated, the government provides large tax savings on house loan repayments for both interest and principal. In addition to receiving tax benefits, keeping your home loan open will allow you to invest in well-managed stock and mutual fund portfolios, which historically have generated returns greater than the interest on home loans.
When should you prepay?
- Reducing part of the debt load will be a good option if you are also paying off other debts in addition to your home loan. However, prepay the debt with the highest interest rate first.
- Additionally, it is preferable to use your surplus income to lessen your debt if you are a risk-averse investor and often invest in fixed deposits and other low-return financial products.
- Another crucial factor is the borrower’s age. It is advised to pay off all outstanding dues as soon as you can if you are approaching retirement.
According to Reserve Bank of India (RBI) regulations, no lending institution may charge prepayment penalties for house loans with floating interest rates. However, in the case of home loans with fixed rates, lenders often charge a penalty equal to 2% of the amount prepaid. Therefore, consider the prepayment fee while considering whether to prepay your home loan.
In addition to these, additional considerations may also have an impact on whether you decide to prepay or not. According to RBI standards regarding prepayment, housing finance providers choose their own terms. Before you decide on one option or the other, you should think about all of them and speak with financial and tax experts.