Is Pre Paying Your Home Loan a Good Idea?
Jun 20, 2017 Home Loan
As the prices of properties are going higher by the day, home buyers have to take the home loan to fulfil their dream of owning a house. But buying a house is expensive and paying its EMI adds to the burden. It’s not a surprise that the home buyers want to pay off the home loans as soon as possible. One reason for paying off the debt early is to be able to afford another loan. Since RBI has asked banks to stop charging the home buyers penalty on paying extra EMI every year, it has become much easier for the loan borrowers to pay off the loans.
Why pre - paying is a wise option?
A buyer pays more amount to the bank for the loan as the interest. Paying off the loan early helps in saving a huge chunk of money to the buyer. Let us supposes that a buyer takes a loan of 50 lacs from the bank at the rate of 9.5% for 20 years. The interest paid by the borrower to the bank will sum up around 61 lacs. By the end of loan tenure, the buyer would have paid 1.11 crore to the bank for the property, which is double the amount paid to buy it.
In this case, pre payment of the loan will make sense. Though, if the loan is in fixed rate of interest the bank will charge the borrower a penalty for the pre payment.
Should a borrower consider pre payment of loan?
There are many ifs and buts related to pre payment of the home loans. In no case, the borrower should exhaust the entire liquid amount to pay off the loan early. There are some cases where pre payment will not be such a wise idea.
Home loans have the lowest interest rates as compared to other loans. If you have extra money with you or some saving, try to pay off another loan first.
Try to invest the savings in other areas where the return would be higher.
IT department keep an eye on the loans that are pre paid. Hence, be ready to prove your legit source.
Things you should be aware of pre payment of loans:
Pre payment of the loan is beneficial only if it is done in right interval of time.
This varies depending on the loan amount. For a higher loan, it is better to save a small amount for few years and then use it to pre pay the EMI. For small loans, it is better to pay an extra every year.
Pre payment also affects your credit worthiness. As soon as you have pre paid your EMI, ask your bank to update your CIBIL database.
Banks usually ask for the source of extra income. Make sure you have the statement of last six months ready.
Tax implications:
A home buyer can avail tax benefit only if the part pre payment amount if equivalent to the interest deduction under Section 80(c) which is Rs 1.5 lacs. In case of secondary property or section 24, 2 lacs is the permitted amount for the self owned property. The penalty is also deductible from the income tax.
Why pre - paying is a wise option?
A buyer pays more amount to the bank for the loan as the interest. Paying off the loan early helps in saving a huge chunk of money to the buyer. Let us supposes that a buyer takes a loan of 50 lacs from the bank at the rate of 9.5% for 20 years. The interest paid by the borrower to the bank will sum up around 61 lacs. By the end of loan tenure, the buyer would have paid 1.11 crore to the bank for the property, which is double the amount paid to buy it.
In this case, pre payment of the loan will make sense. Though, if the loan is in fixed rate of interest the bank will charge the borrower a penalty for the pre payment.
Should a borrower consider pre payment of loan?
There are many ifs and buts related to pre payment of the home loans. In no case, the borrower should exhaust the entire liquid amount to pay off the loan early. There are some cases where pre payment will not be such a wise idea.
Home loans have the lowest interest rates as compared to other loans. If you have extra money with you or some saving, try to pay off another loan first.
Try to invest the savings in other areas where the return would be higher.
IT department keep an eye on the loans that are pre paid. Hence, be ready to prove your legit source.
Things you should be aware of pre payment of loans:
Pre payment of the loan is beneficial only if it is done in right interval of time.
This varies depending on the loan amount. For a higher loan, it is better to save a small amount for few years and then use it to pre pay the EMI. For small loans, it is better to pay an extra every year.
Pre payment also affects your credit worthiness. As soon as you have pre paid your EMI, ask your bank to update your CIBIL database.
Banks usually ask for the source of extra income. Make sure you have the statement of last six months ready.
Tax implications:
A home buyer can avail tax benefit only if the part pre payment amount if equivalent to the interest deduction under Section 80(c) which is Rs 1.5 lacs. In case of secondary property or section 24, 2 lacs is the permitted amount for the self owned property. The penalty is also deductible from the income tax.
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