Prepayment of housing loan means paying an additional amount to your home loan over and above the principal & the interest amount. Prepayment on home loan can either be in full or in parts. You can either choose to repay your home loan fully which is also referred to as home loan foreclosure/ home loan pre closure or make partial repayment of home loan as and when you have the surplus funds. This housing loan partial repayment is generally referred to as home loan part payments. Although a home loan is your long-term financial commitment and prepaying will help you to save a substantial amount of the interest outgo, it is important to understand its salient features before you choose to prepay.
In the following article, we will discuss the important things that you must be aware of before you choose to pay off your home loan in full or choose home loan partial repayment
- Do Not Use Your Emergency Funds
The funds which you set aside for your emergencies such as medical treatment, hospitalization, life covers, insurances, etc. are your emergency funds. By using your emergency funds, you defeat its very purpose and hence you may have to borrow additional funds later in the alarming situations of financial emergencies. Therefore, keep your emergency funds intact and use other alternatives to prepay your home loan. If you fall short on the emergency funds consider applying for a quick personal loan or mortgage loan. Also, Click to learn the difference between the two.
2. Do Not Liquidate Your Investments
Apart from the emergency funds, also do not liquidate those existing investments which you have invested with a specific purpose to meet your financial goals such as savings for your children’s education, higher studies, marriage, savings for your old age, etc. By liquidating you are again defeating the purpose of the investment and may have toavail a loan or additional loans in the future to meet your financial commitments.
3. Consider Liquidating Your Surplus Investments
You may consider using the surplus funds on your investments such as the investments in fixed deposits (FD) & recurring deposits (RD) with the banks and PF withdrawal for home loan prepayment. The interest you earn on investing in fixed and recurring deposits may be less as compared to the interest you pay towards the housing loan. The interest earned on the FDs ranges from 3%-6% p.a. while the interest payable on home loans ranges from 7%-10% pa. Therefore, make a smarter move and use your surplus funds on the deposits to prepay your home loans. Additionally, you may also consider the returns on the investments of equities and mutual funds to prepay your housing loan.
4. Avoid Lenders Having Pre Closure Charges For Home Loans
You must compare and evaluate the lenders – Banks/NBFCs/HFCs and their best home loan schemes before you apply for a housing loan. When you prepay the lenders lose their interest earnings and hence, they charge a penalty for prepayment of home loan. The conditions and the home loan prepayment charges vary with the lenders and range from 2%-5% on the outstanding loan amount. Remember there are no foreclosure charges for home loans with floating interest rates but if you have a fixed home loan interest you have to pay a penalty for paying home loan early. It is therefore important that you carefully select the lender before you apply for a home loan. Consider applying for a home loan with ICICI Bank & a home loan with HDFC Bank who has nil housing loan pre closure charges on floating home loan interest rates and low housing loan foreclosure charges on fixed home loan interest rates.
|ICICI home loan prepayment charges & ICICI home loan partial payment Charges||0% – 2% on outstanding loan amount|
|Home loan prepayment charges HDFC & HDFC home loan partial prepayment charges||0% – 2% on outstanding loan amount|
|Canara Bank home loan prepayment charges||0% on outstanding loan amount|
Also Read: All Costs & Hidden Costs In Home Loan.
5. Ensure Your Prepayments are Reflected in the CIBIL Reports
Whenever you prepay your home loan, don’t forget to get it documented by collecting a NOC certificate for home loan closure from the lender Bank/NBFC/HFC. Your prepayment will be reflected in your CIBIL reports and hence repayment of a home loan before time is a sign of your financial fitness which further improves your CIBIL scores and your creditworthiness.
6. Choose Wisely Between the Loan Tenure and EMI
When you make part payment in home loans, the prepaid lump sum amount is deducted from your outstanding home loan principal and you pay interest only on the balance principal outstanding. Also, when you make part payments, either your loan tenure is shortened or your home loan EMI reduces. Depending on your requirements, choose wisely between the two as the reduction in the EMI will reduce your monthly burden while the reduction in the tenure will save on the total interest payable to the lender. Know how much you save on your revised EMIs with a home loan partial payment calculator.
7. Prepaying the Loan at Beginning of the Loan Tenure
For any loans availed the majority of the interest is paid during the initial years of the tenure. Therefore, the home loan EMIs during the initial years have a higher interest component than the principal amount. The home loan prepayment benefits include savings on interest payable. Hence, when you prepay / foreclosure your loan during the initial period of the home loans you save on the interest component. However, if you are planning for additional loans and if your existing home loan is hampering your eligibility, you may consider repaying your loan even at a later stage.
8. Tax Saving on Your Home Loan
Your home loan qualifies for income tax exemption for housing loan repayment under 80(C) for a principal amount up-to Rs.1.5 Lakhs and under section 24b of income tax for the interest on housing loan up-to Rs.2 Lakhs. If you prepay, you may not get the home loan prepayment income tax benefits on a home loan. The interest which you will save by prepaying is likely to be much higher than the tax you will save.
9. Evaluate Your Savings Through Home Loan Balance Transfers
You may choose to switch your lender for more savings on interest. This ensures that your existing investments are not liquidated to repay the loan and you also save on the interest amount. If your existing interest rates are high, click to know how to deal with the increasing interest rates of housing loans.
Best Home Loan Transfer Rates
|Bank Name||Home Loan Balance Transfer Rate Of Interest||Processing Fees|
|ICICI Bank||6.80% p.a. – 7% p.a.||Starts from Zero|
|HDFC Ltd.||6.75% p.a. – 7.40% p.a.||Starts from Zero|
|Canara Bank||6.90% p.a. – 8.90% p.a.||Rs. 10,000 + GST|
|Click to get the complete chart on interest rates for home loan with prepayment option|
Kindly refer to the links given below to know the documents required for a home loan balance transfer.
|Proprietorship Firm||Partnership Firm||Private Ltd. Company|
10. Evaluate if Investing the surplus is Better Than Prepaying
Check if the interest you save by prepaying the home loan is greater than the potential returns you earn by investing the same amount. If the interest you save is higher, you should prepay the home loan & if the returns on investments are higher you should invest. Well, the decision will be your personal preference depending on your needs. Additionally, you may also plan to grow your money by diversifying some portion of your surplus in the investments and remaining for prepaying and reducing your home loan burden. Grow your money by diversifying the investments in these 8 best plans to save.
Also Read: Everything You Must Know About SIP.
11. Going for EMI is Better Than Opting for Pre-EMI
Pre-EMI is paid when you purchase an under-construction property while EMI is applicable when you take possession of the property. (Additional Read: Important loan facts while purchasing an under-construction property) In EMI you repay both the principal as well as the interest amount to the lender, while in Pre-EMI you pay only the interest to the lender. Also, the Pre-EMI period is not a part of your home loan tenure. Therefore, if you have sufficient income you should opt for the full EMI option right from the beginning because in Pre-EMI you cannot prepay a loan until you start paying the full-EMIs on your property. Also the earlier you start with full EMI, the sooner you will be debt-free. Click to read our full article – If Pre-EMI is better than full EMI.
12. Do Not Forget to Take Heed of Your Current Age
Remember if you are nearing retirement, foreclosing the home loan with your surplus funds will be a suitable option because generally after retirement you have access to limited income which causes difficulty in the loan repayments. Also, as your age increases your medical expenses might increase resulting in home loan defaults. Therefore, try to prepay your home loan as early as possible before you retire.
13. Choose Which Loan You Wish to Prepay First
Nowadays having more than two loans in your name is a very common scenario. If you are having more than two loans, for instance, a home loan, a personal loan (PL) / business loan (BL), and a car loan, it is often difficult to decide which loan you prepay first. Under such circumstances consider prepaying your unsecured loans i.e., PL & BL over the home loan because such loans usually come with a shorter duration and have high interest rates which keep your monthly outgo high and they also eat a majority of your loan eligibility. Also, you do not enjoy any tax benefits on personal loans. Hence it is better to prepay your unsecured loans first over the home loans. Click to know everything about the unsecured loan i.e., the business loan.
Also Read: How To Manage Your Multiple Loan Repayments
Points To Remember
- The prepayments are beneficial if the interest rates are more likely to increase in the future.
- If you are finding it difficult to foreclosure your home loan, consider making part payment to your home loan. The part payments help you to either shorten your home loan tenure or to reduce your EMI. You save on the interest cost when you make part payments since the interest will be charged only on the balance outstanding amount. Hence pay in parts and reduce your interest burden.
- There are no home loan prepayment rules which suggest you should visit the branch to pre-close your home loan. You can also make home loan repayment online for instance online partial prepayment of home loan HDFC, HDFChome loan online prepayment, ICICI Bank home loan prepayment online, ICICI home loan part payment online.
- Foreclosure charges of home loans are different from the foreclosure charges on lap i.e., loan against property. Mortgage loan pre closure charges vary from 2% – 4% on the outstanding loan amount.
- To avail of a home loan without prepayment penalty get in touch with us today.
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