What are the Pros and Cons of Prepaying a Home Loan?
Oct 15, 2018 Home Loan
You moved to a bigger city for your job. Initially, most of us take up a rented house for a few years. Now that you have reasonable savings to pay the down payment for your flat, you make up your mind to go for a home loan to purchase your dream home. Purchasing a home is a long-term investment and so is the home loan. You must be aware that the higher is your interest if the duration of loan repayment is longer.
When you have some liquid amount, should you repay the loan so that at least you get some waiver on interest or should you invest that amount in another financial instrument?
When you have some liquid amount, should you repay the loan so that at least you get some waiver on interest or should you invest that amount in another financial instrument?
Here are some tips so that you can make your decision.
You can check if you are paying higher interest on home loan after the tax deduction savings as compared with the expected returns from any investment in a long-term asset such as equities or fixed deposits. We all know the fixed deposit interest that we may get, which is lower than the home loan interest. Equities could get you higher returns; however, it is uncertain if you consider it for short term.
Tax savings on home loan
If the property is self-occupied, then you could get tax exemption on up to INR 2 lakh on the home loan in a financial year under Section 24. An additional deduction of up to INR 50,000 is available for first time home buyers under Section 80EE, which is towards the interest component. Someone who falls under the highest tax paying category can save up to INR 60,000 each year. Under Section 80 C, you can get a benefit or up to INR 1.5 lakh on the principal component of the (equal monthly instalment) EMI. However, you may choose to invest in PPF, ELSS or mutual funds under this section.
What to choose between home loan tenure and EMI
It is a wiser option to choose reducing home loan tenure over Monthly EMI. If you are planning to prepay your home loan, you will be benefitted with savings on interest expenditure, the principal outstanding amount will be reduced, there will be financial stability, and it will have a significant effect on your credit rating. Besides, several lenders opt not to levy charges for the prepayment. So, home buyers should choose the option carefully, before availing the home loan.
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