How To Plan Home Loan Prepayment

By | August 19, 2016

How To Plan Home Loan Prepayment

Does the outstanding amount on your Home Loan give you sleepless nights? Here’s help. We’ll tell you how to plan regular prepayments on your Home Loan.

Prepayment can gradually reduce the burden of a Home Loan for real-estate investors. If you prepay your Home Loan on a regular basis, you can shrink both the principal amount and the interest on the loan. Think of it like eating a chocolate bar. A really big chocolate bar.

Is prepayment easy?

Banks generally don’t charge a prepayment penalty for your Home Loan. That makes prepayment a piece of cake, right?

All right, enough with the food analogies. Let’s tell you how to plan your prepayments.

How to fund prepayments on your Home Loan

Accumulate funds

How do you do that? Invest a certain amount regularly in savings such as equity or debt instruments and build a sizable fund. Use this to chip away at your Home Loan.

Bonus money and asset liquidation

Are you due to receive a bonus from work shortly? You could plan to use your bonus to fund your Home Loan prepayments.

Some of your investments not earning high enough returns? Consider liquidating these funds and divert them towards prepaying your Home Loan.

Additional Reading: Dos & Don’ts of Home Loan Prepayment

It helps to prepay a Home Loan

  • Interest reduces: As the principal amount due on your Home Loan shrinks, so does the interest component charged on your loan. Due to the effect of compounding, in the first few years of a Home Loan, you will be paying off the interest. Prepayment in the early years significantly helps reduce the interest outflow.
  • Income Tax savings: You can claim tax benefits under Section 80C of the Income Tax Act by making prepayments on your Home Loan. This is, of course, for the principal portion.
  • Prepayment allows more funds for investment: Your loan tenure was 25 years? Been making regular part prepayments? Your loan tenure is now only 19 years. A huge sigh of relief, right? If you close your Home Loan earlier than expected, the money you had earmarked for the loan EMIs can be used for other investments.

Some factors to consider

Think about this before you leap into making prepayments on your Home Loan.

  • Lowers tax benefits: A Home Loan payment helps to decrease your Income Tax amount. If you close your Home Loan early, or reduce the outstanding amount on the loan, be prepared to save that much less on Income Tax.
  • Impact on household budget: Making a prepayment on your Home Loan means a sizable sum of money going out of your bank account or monthly budget. This could impact your household expenses or monthly financial plan.
  • Reduces liquidity: Remember that a prepayment on your Home Loan reduces the amount of cash in hand.

When NOT to prepay a Home Loan

It’s not always the best idea to make prepayments on your Home Loan.

  • Insufficient emergency funds: Your prepayments on a Home Loan should not result in a depletion of your emergency fund. What will you fall back on, when you need it the most?
  • Other pending loans: Prioritise your finances. Close any other high-interest loans such as a Credit Card or Personal Loan before deciding to make prepayments on your Home Loan. That way, it’s one or two more loans less to worry about, right?  

It always helps to think Home Loan prepayments through. Thoroughly.

Additional Reading: Your Home Loan Handbook

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About Dheeraj Kapoor

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