A decent home in the heart of a metropolitan, equipped with all the standard and luxury amenities, is perhaps the most cherished dream of every individual. There are times when people have to leave their dream behind and move ahead, or at least, put it aside for the time being, in case of a financial crunch. This is where the role of banks and financial institutions comes into play, which helps people fulfill their dream by providing adequate home finances.
However, with the Indian rupee still flirting with the American dollar, the interest rates continue to fluctuate and affect the overall financial standing of the borrowers. Parinita, a middle-class working woman based in Ahmedabad, decided to apply for home loan at floating rates for purchasing a decent apartment. Owing to the recent fall in the Indian rupee, her lender increased the interest rates, thereby increasing her financial burden further. Having a healthy amount of savings in the bank, Parinita let her avaricious instincts supersede and invested the sum in mutual funds. To her surprise, things changed drastically and she had to face a great deal of trouble in servicing the EMIs. Had she channeled her surplus funds towards partial repayment of home loan, she wouldn’t have found herself in such a quandary.
Part prepayment is a facility offered by banks that most borrowers tend to be ignorant about. For most borrowers, this option only seems relevant when the interest rates have increased significantly, or the EMIs have gone haywire, which is of course not a correct way to use this option. People must surely consider the facility of part prepayment as something, which, when done occasionally, relieves them from the interest burden over a period of time.
What is Part Prepayment?
Partial prepayment of the home loan is an extra payment made over and above the ongoing EMIs. The basic purpose of making occasional part payments is to reduce the principal amount and the overall interest burden, rather than reducing the number of EMIs. Recently, to ease the repayment process for the borrowers, the RBI and the National Housing Bank have released a notification to the banks, discarding the practice of charging penalties on prepayment of EMIs. This has certainly helped the individuals to save good money on repaying their debt over a period of time.
How can you save money through partial repayment?
As a normal thumb rule, the longer the home loan tenure, the greater will be the interest burden exerted on the borrower. Partial prepayment is an effective way of cutting down the interest obligation by paying an additional sum of money along with the usual EMI payments. This certainly helps in reducing the amount of outstanding principal, thereby bringing down the home loan tenure and the overall interest burden of the borrowers. As an added advantage, any amount of money directed towards prepayment of principal loan amount qualifies for being deducted under section 80C of the Income Tax Act. For a person, who is not fully utilizing the permissible deduction of Rs.1 Lakh, this might be a useful addition to the deductions head in the ITR.
Partial prepayment of home loans is also accompanied by several other benefits, including the facility of withdrawing any surplus amount from the loan account, if not required. However, this might mean reducing the advantage of low interest rates that normally accompany home loan prepayment. The facility of withdrawal can be enjoyed at a cost equivalent to 25-50 basis points, which is certainly more in comparison to the regular home loan accounts. As of now, this offer is provided by only a few selected banks in India, with SBI (SBI Max Gain), HSBC (Smart Home), and Standard Chartered Bank (Home Saver/Home Credit) being the top lenders.
Essential Tips to Follow
There are some important tips that borrowers must follow wisely to gain maximum advantage of this facility of partial prepayment of the home loan.
- The earlier, the better – The interest rate is generally higher at the beginning of the payment period, which makes partial prepayment a more beneficial option during this period, rather than delaying it to the later stages.
- Penalties/Charges – Though the RBI has ruled out the option of levying penalties and charges on the partial prepayments made by the borrowers, it is only the floating rate home loans that have been freed from such charges. The fixed rate home loans, on the other hand, are subject to certain charges, which might hamper the benefits of interest reduction.
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