Is Home Loan Pre-Closure Good or Bad?

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Borrowers are able to reduce their interest burden and save money if they prepay their housing loans. When you avail of a loan, the interest increases the actual price of your property. Therefore, you may want to prepay the loan amount to save money.

You may be thinking that you are able to enjoy tax benefits on their loans. You may deduct up to INR 2 lakh towards the loan interest as per the Income Tax rules. However, you lose the home rent allowance (HRA) benefits when you live in your own house. Therefore, your actual savings may be much lower than you consider.

Buying a home without a loan may not be possible because of the rising property prices. However, if you have some funds, prepaying the home loan is recommended. Here are two points you must consider while prepaying the loan.

1. Investment versus prepayment

Most of the safer investment products, such as public provident fund and fixed deposits yield returns between 8% and 9%. If you choose to invest in high-return instruments like equity, there is a risk of losing the capital too. On the other hand, if you use your funds like a bonus to prepay the housing loan, your interest burden will reduce. It is advisable to invest the funds in case you are able to earn returns that exceed the rate of interest on your housing loan.

2. Reduce tenure or decrease monthly installment

The borrowed amount is repaid in Equated Monthly Installments (EMIs) based on the principal, interest rate, and loan tenure. When you prepay part of the outstanding loan, the tenure is automatically adjusted. However, you may also choose to reduce the EMI. However, it is advisable to reduce the tenure to enjoy monetary savings on the balance amount. Furthermore, you may consider increasing the EMI when your salary increases for additional benefits.

How to prepay?

While prepayment is advantageous to you, it is a financial loss for the lenders. Financial institutions borrow funds for a longer duration. Therefore, when you prepay the loan, they need to redeploy the funds, which entail additional costs for the institutions. Therefore, lenders do not encourage borrowers to prepay the loan amount. Your lender may ask you to physically be present while prepaying the money. However, you may offer an authorization letter to a representative and lenders are not allowed to put any restrictions on borrowers.

Dos and don’ts of prepaying a home loan

Just like you check your home loan eligibility, it is important you gather information before you prepay the borrowed amount. Here are six important dos and don’ts to remember.

1. Carry a government-issued photo identification, such as Permanent Account Number (PAN), passport, or driving license.

2. In addition to the prepayment amount, you will need to pay simple interest on the amount being prepaid. Also, carrying your cheque book is important.

3. You must ensure to collect a payment acknowledgement that mentions the prepaid amount and the outstanding loan. It must be stamped and signed by an authorized representative.

4. You may need to issue new post-dated cheques (PDCs) with the revised EMI amount. It is vital you ensure you take back the previous PDCs from the lenders.

5. It is recommended you clearly mention your name, mobile number, and loan account number on every cheque.

6. Lenders may ask you to provide proof of the source of the funds. It is advisable to provide six months’ bank statement while prepaying the loan amount.

When you prepay the loan amount, it is very important to ensure your credit record is duly updated. Generally, the record is updated within 45 to 60 days. It is crucial to ensure the same is updated on time because your credit worthiness is determined by your credit score.

You must consider your current and future financial needs and situation before you decide to prepay the housing loan. It is important that you make an informed decision and do not rush into one.

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