Summary of this article
Home loan prepayment can help reduce long-term interest costs, but it must be planned wisely. Borrowers should ensure interest savings outweigh any penalties, avoid using emergency funds or goal-based investments, and carefully assess whether to cut EMIs or loan tenure based on liquidity needs.
Home loans are generally the biggest financial commitment most of us make in our lifetime. With the availability of a longer loan tenure, usually up to 30 years, and higher loan amounts, a major proportion of our active working years is consumed by loan repayment, leaving less room to achieve other goals.
We can avoid this situation by prepaying the home loan. But before you proceed with this option, take note of the following points to make the most of home loan prepayment.
1. Ensure Interest Savings Exceed Prepayment Penalties
As per the RBI norms, banks are not allowed to levy prepayment charges on floating rate home loans sanctioned to individual borrowers. However, as lenders may levy prepayment charges on non-individual borrowers on fixed rate loans, it’s important for you to check prepayment charges levied by the lender before making any prepayment. Go ahead and prepay only if the overall savings in interest cost significantly outweigh applicable prepayment charges, if any.
2. Avoid Dipping Into Your Emergency Savings
Emergency fund is usually accumulated to deal with financial exigencies or to meet mandatory expenses during unemployment or loss of income arising out of disability. The size of your emergency fund, therefore, should be sufficient to meet the mandatory expenses for at least 6 months. If you utilize your emergency fund for making home loan prepayment, any unforeseen event thereafter might force you to avail loans at higher interest rate or redeem other existing investments at sub-optimal prices. Thus, never count your emergency fund while garnering resources for making home loan prepayment.
3. Weigh Liquidity Needs Before Opting for EMI or Tenure Cut
You can choose between two options while part-prepaying your home loan. You can either reduce your EMI amount and continue with the same tenure, or continue with same EMI and reduce the loan tenure. The decision to choose between the two should primarily depend on your disposable income and liquidity requirement. Make sure to do comparative analysis of savings generated from both options before deciding.
4. Don’t Liquidate Investments Meant For Specific Goals
Most of us have earmarked investments to timely achieve our financial goals - be it accumulating corpus for a child’s higher education, arranging down payment for a loan or planning for retirement.
While planning to prepay your home loan, make sure not to redeem your existing investments earmarked for specific goals, as doing so may force you to avail costly loans later on for fund requirements arising for achieving these goals. Moreover, as many loans require a certain amount to be contributed by the borrower as margin money or down payment, if you redeem the investments set aside for making such down payments, you might be deprived from availing those loans due to lack of down payment.
