Home loans have long been one of the most significant liabilities for most Indians. These loans often involve long repayment periods, spanning over 20-30 years. They remain enormous liabilities for people, and individuals often desire to pay back the amount early.
A pre-payment loan plan can help you achieve this goal, especially if you have a floating interest rate. Most home loans with such floating interest rates involve no penalty for partial prepayments and prove to be a handy financial tool.
Why prepay your loan?
Having the responsibility of a loan is a pressure nobody wishes to deal with. We all struggle with this issue, as we have been taught from a young age that borrowing money may be inherently wrong. The discomfort remains for several people, even when a loan might be a good financial decision. If peace of mind is what you are seeking, a prepayment loan plan can help you reach that goal more quickly.
A home loan with a floating rate of interest is the perfect tool for you in such a situation. However, interest rates may rise and fall at any time. If there is the expectation that the interest rate may increase soon, prepaying a part of your loan helps you bring the total due amount down.
During such a period, the decision to make a higher payment towards the principal can bring your outstanding dues down at a higher speed.
Repo Rates: A Crucial Indicator Of Changing Rates
The repo rate dictated by the RBI plays a considerable role in influencing the interest rates charged by banks. The repo rate dictates the rate at which the RBI lends money to commercial banks and NBFCs, whenever their funds are inadequate.
Over the past few months, the RBI has increased the repo rate repeatedly to curb inflation. An uptick in the repo rate usually causes loan interest rates to shoot up, thus disincentivizing people from borrowing money. Therefore, there is immense speculation in the market now about how far the rates could rise.
Floating interest rate loans, too, are linked to the repo rate, so now would be a wise time to reassess your home loan repayment plan and how it may be impacted in the long run.
Factors To Consider For Prepayment
Your home loan prepayment strategy must be based on a few essential factors: interest rates, current cash flow, income security, and tax benefits.
Prepaying a portion of your home loan will affect the income you have accessible. Not having essential funds handy in a financial emergency can cause significant issues. Make sure that you are in a stable situation before making such a move.
As the interest rates show an indication of increasing, it would be wise to repay larger chunks of the loan to avoid paying additional interest to banks. Another critical aspect to consider is the tax benefit you get on your home loan.
Home loan interest rates are some of the lowest in the category, and borrowers receive tax-saving opportunities on the principal amount and the interest. However, these tax benefits have their limitations, and you may often benefit from making partial prepayments on your home loan.
If there are additional income injections expected in the near future, such as bonuses or arrears, they can be diverted to make a bulk partial prepayment, decreasing the obligation you have to the bank.
Deciding Your Home Loan Prepayment Strategy As India’s interest rates are speculated to increase soon, it would be an excellent time to assess your financial situation and see if you are well-poised to divert money for EMIs. Make sure you have a financial cushion in place for emergencies, with at least six months’ expenses covered. Now would also be a good time to explore high-return avenues that could help you make additional income for payments in the future. No matter the ups and downs, Ruloans is here to help you navigate the journey that lies ahead.