The largest loan in the portfolio of a borrower is usually the home loan. Even though a home loan helps you build a beautiful abode for yourself, the home loan equated monthly instalments (EMIs) can take up a significant portion of your salary. These heavy EMIs end up hurting your whole budget and making you anxious in the face of uncertainty.
Therefore, it makes sense that you would desire to prepay home loan as quickly as possible.
Usually, the earlier you prepay home loan, the better it is. However, the prepayment of a home loan should only be done after carefully weighing the advantages and disadvantages.
Why You Should Prepay Home Loan
Prepaying a home loan can offer several advantages, especially financially.
Significant Savings In The Interest Payout
Your monthly home loan payment includes an amount towards the interest costs. A portion of the loan installment is also applied to the principal part. The expense of interest will decrease as soon as the principal does. This implies that the sooner you prepay a home loan, the larger the interest savings.
Free Cashflows For Other Financial Goals
When you prepay a home loan, you will be left with extra funds in your pocket to spend on other things because you are no longer making monthly home loan payments. You could, for instance, put the additional cash toward your child’s college expenses, save up an emergency fund, or put more of an emphasis on long-term objectives like retirement.
Increase In Creditworthiness And Bandwidth To Borrow More
If you have a sizable home loan, getting a car loan to upgrade your vehicle or even a personal loan may be challenging. Lenders are more inclined to extend you a larger loan if you have fewer outstanding debts. Prepaying your home loan could significantly increase the amount of loan a lender would be willing to lend.
The Fantastic Feeling Of Owning Your Home Independently
The feeling of not having to make home loan EMI payments is fantastic. It gives you a sense of independence. Owning your own home is a nice feeling. You may rest easy knowing there is no chance you won’t be able to pay your monthly EMI even if you suffer a financial setback.
Why You Should Not Prepay Home Loan
While prepaying your home loan could be advantageous, here are a few things you must consider before making the big decision.
Impact On Tax Benefits
The home loan principal and interest payments have significant tax deductible advantages in India. According to Section 80C of the Income-tax Act of 1961, you can get a deduction of up to ₹ 1.5 lakh of the principal amount, and Section 24 of the Act allows you to claim a deduction of up to ₹ 2 lakh of interest payments. You will lose out on these tax benefits if you prepay a home loan.
Impact Of Other Costs And Cashflows
Prepaying a home loan would not be wise financially when the borrower has additional high-interest loans or the borrower’s income has decreased. In such situations, it would be better to repay the higher-interest loan before deciding to prepay a home loan. It is also vital to perform a cost-benefit analysis in case your home loan has preclosure charges.
Impact On Savings
If one has no or significantly fewer savings, then prepaying the home loan would not be a wise financial decision. A situation such as a medical emergency or a layoff may arise when savings would come in handy. So, to be on the safer side, prepaying a home loan should be deferred until after making enough savings to take care of unforeseen events.
The Bottom Line
Prepaying for a home loan is easily one of the most significant financial decisions in an individual’s life. To ensure financial stability, before you prepay a home loan to save on interest expenses and manage your finances better, it is essential to ensure a proper financial plan that includes setting up emergency funds and planning taxes well in advance.
Ruloans is here to help you manage your finances throughout the journey that lies ahead of you.