If you’re mulling foreclosing your Home Loan in order to reduce the interest burden, stop and consider the following things.
Buying your dream house early in your career is a goal every working professional aspires for. It comes with its set of advantages too. If you buy a house in your late 20s or early 30s, you have a good 30 years before your retirement to repay your Home Loan.
Home Loans are also eligible for certain tax benefits. The principal that you repay is eligible for tax deduction under Sec 80C while the interest paid on your loan is eligible for tax deduction under Section 24. In order to woo customers, banks these days have extended the loan repayment tenures on Home Loans to 30-40 years, but borrowers are wary of paying much more than what the loan cost them as interest.
Many are thus caught in a dilemma of whether to foreclose their Home Loan to save on interest that they pay to the bank or save on the tax that they pay to the government.
Additional Reading: Top 5 Reasons For Home Loan Rejection
Why Do Some People Consider Foreclosing A Loan?
Earlier, foreclosure charges amounted to a hefty 5% or more of the principal outstanding. This acted as a great deterrent for those who wanted to foreclose their Home Loan. However, in a mandate dated 2012, the RBI laid down that banks can no longer levy foreclosure fees to borrowers who have a Home Loan on a floating rate of interest.
Borrowers might be encouraged by this to foreclose their loan but they should stop and consider owing to reasons that we will discuss in a bit. For those who’ve taken out a Home Loan with a fixed rate of interest, banks will still charge around 4% on the outstanding principal.
For many, a Home Loan can be a source of constant stress especially because it comes with a much longer tenure of repayment than most other loans. Even when they’re comfortable paying the EMIs, they prefer closing the loan as soon as they can afford to in order to avoid “being in debt”.
Additional Reading: The Dos And Don’ts For Home Loan Prepayment
What Should You Keep In Mind Before Foreclosing A Home Loan?
If you’re mulling foreclosing a Home Loan after a sudden inflow of considerable cash or the sale of an asset, weigh in on the following factors before you arrive at a decision:
- Compare Tax-Savings Vs. Interest Outgo:
As mentioned above, your Home Loan is eligible for certain tax benefits. If you’re planning to foreclose it, you will have to forego the tax deductions that your loan may be eligible for. Work out a comparison between your interest outgo and tax savings to see if your interest outgo exceeds your tax-savings.
In such a case, you should consider foreclosing the loan. Remember, if you’re foreclosing the loan, you might also have to check if there are other sections of the IT Act that you claim savings under and reduce your tax burden with in the absence of a Home Loan.
Additional Reading: Does It Make Sense To Opt For A Joint Home Loan?
- Check If Your EMIs Leave Enough Savings For You:
Your monthly salary not only helps you in meeting your day-to-day expenses but also helps you build some wealth for the future. If your Home Loan EMIs are eating too much into your salary and barely leaving you enough for savings and investments, you might want to consider foreclosing the loan as soon as you get a windfall.
In fact, you should aim for pocket-friendly EMIs right from the start of your Home Loan and a Home Loan EMI calculator may help you decide just that. When you start paying EMIs that are much lower than your paying capacity, you end up saving a hefty sum every month.
- Take Stock Of Your Other Important Commitments:
You might have a score of other equally important short-term and long-term financial commitments like your child’s education, marriage, corpus for emergencies, funds set aside for medical emergencies etc. that might need an infusion of cash much more than your Home Loan foreclosure.
Additional Reading: A Homeowner’s Guide To Home Insurance
- Check If It’s Better To Invest The Surplus Funds:
You can also choose to invest these surplus funds instead of using them to foreclose your Home Loan. If you’ve been thinking in this direction, then in order to decide what is more lucrative, you should factor in the projected returns from investing this surplus money and compare these with your interest outflow on your Home Loan during the same timeframe.
Opt for foreclosure only if your interest outgo outweighs your investment earnings. If you’re nearing retirement and still have a long tenure of loan repayment ahead of you, you may want to use the surplus funds to foreclose your loan.
With foreclosure charges lifted from Home Loans with floating interest rates, foreclosing it may seem like an attractive idea. But remember to consider the above points carefully before arriving at a decision to make best use of your surplus funds.
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