Home Loan is a life-time commitment. It is a big debt which can consume most of your monthly income. Closing home loan early gives freedom from paying EMIs.
Banks used to charge a penalty for closing home loans early. As per the new rules of RBI, they are now forbidden from charging prepayment penalty on floating rate home loans. If your bank still charges a prepayment penalty, lodge a complaint with the Consumer Forum of India and the Banking Ombudsman.
Decide what’s best: Getting rid of the monthly burden or enjoying tax benefits on the home loan. If you want to get rid of the home loan, you need a plan. Let closing the home loan be an important goal. The ideal time to think about this is the late 30s or early 40s. This is the time when you are done with changing jobs and are earning a steady income. However, closing a home loan early allows you to save for retirement. Be careful not to use all the available finances to close the loan. Set aside some money for unexpected emergencies.
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If you plan to avail a home loan, choose the tenure wisely. The general notion is: longer the tenure, lower the EMIs. This enables you to repay the loan comfortably, but it also increases the cost of the loan. This is because you end up paying interest for a longer period of time.
Consider your age, income and repayment capacity while selecting home loan tenure. If you are caught with the home loan for too long, you will not be able to do justice to other financial goals.
Use the home loan EMI calculator to get an approximate figure of the EMIs. Following are some tips to close home loan early:
Use windfall gains, bonus or any incentives to partially prepay the home loan. IT employees get annual bonuses. Use this extra money to prepay the home loan. Even if you manage to pay an additional couple of lakhs each year, you can close the home loan early.
When prepaying the home loan, banks give the option of either reducing EMIs or loan tenure. The best way to close the home loan is to reduce loan tenure. EMIs will be the same, but you can close home loan faster.
When to go for prepayment of Home Loan?
1. If home loan interest rates are expected to go up.
2. If you have excess cash at your disposal.
3. If lender doesn’t charge a penalty prepayment.
You get a salary hike each year. This is when you should be paying more towards EMIs. Doing this each year will drastically reduce home loan tenure. As you are paying more than the actual EMIs, home loan outstanding will reduce.
Consider home loan balance transfer if other banks are offering lower interest rate, than the existing lender. Try to keep loan tenure the same. Opt for the highest possible tenure, as it will help in reducing the EMI burden. Consider home loan balance transfer as early in the tenure as possible, after accounting for processing fees. Do not opt for balance transfer towards the end of the home loan tenure.
When you avail a home loan, don’t forget your investments. Consider investments which give higher returns. If any of the investments aren’t performing, liquidate them and use the money to pay off home loan EMIs.
For instance, if you are paying 9% interest on the home loan, consider investing in avenues giving returns of around 10%. If this is not possible, liquidate investment and pay off the loan.
1. Home Loan offers tax benefits:
2. Any deduction exceeding the above limits cannot be claimed. Remember, it is wise to do a cost-benefit analysis before you prepay loans which give tax benefits.
3. Assess the pros and cons of prepaying the home loan. The advantages and disadvantages are unique to each borrower.
4. Keep track of the bank statements, which reflect home loan EMI payments.
5. Keep a photocopy of the cheque or demand drafts of any lump sum payments, made towards home loans.
6. Collect an acknowledgement letter duly signed and stamped by the lender, which declares that you have made a prepayment, in part or full, and that you are not entitled to pay further interest or principal towards the home loan.
1. If you earn a good salary, prepayment may not be wise. Home loans offer tax benefits which you can use to save tax.
2. When you are getting excellent returns on investments.
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