Prepayments on homes might lessen your overall debt load. Pre-payments, however, involve more than just adding on extra installments as your resources allow. Prepaying your home loan should be carefully considered in order to improve your financial situation.

Important considerations for home loan prepayment

Your financial requirements

Prepaying your home loan will reduce your interest expense, but it will also use up liquid assets that could have been utilized to meet immediate financial obligations or medical emergencies. Therefore, before making a home loan prepayment, make sure you have enough liquid assets to cover your immediate financial needs, as well as any unexpected medical costs or living expenses that may arise from a difficult situation, like losing your job. 

Stage of the loan

The main advantages of prepaying your home loans are the savings on interest costs. The amount of interest you will save on your home loan depends on where you are in the repayment process. At the beginning of your home loan, the interest component of your EMI is the largest. Prepaying your mortgage at a later point could not result in significant interest savings. If you don’t want to take out another loan and lower your home loan eligibility, spending your extra money on home loan prepayment or foreclosure is not a feasible option.

Age of the borrower

Before prepaying your loan, it’s necessary to take into account your age. It is advisable to pay off your housing loan as quickly as you can if you are close to retiring. This is because you won’t have much money left over after retirement to pay off debt. Additionally, as you become older, your medical expenses are probably going to rise as well, increasing your risk of loan default. It is preferable to pay off all of your outstanding debts as soon as you can in order to prevent such a situation.

Home loan tax benefits

The government of India provides a number of tax advantages on housing loans in an effort to get more people to engage in the country’s real estate market. You may claim a tax exemption on the principal amount of your house loan repayment of up to Rs. 1.5 lakh every fiscal year under Section 80C of the Income Tax Act of 1961. Additionally, Section 24(b) of the Income Tax Act allows you to receive a tax exemption of up to Rs. 2 lakh on the interest paid on home loans taken for self-occupied homes; there is no limit for non-self-occupied homes. You won’t be able to take advantage of the aforementioned tax advantages if you fully prepay your loan. So, before you prepay your loan, think about the tax advantages.

Returns from investments

You can invest whatever extra money you are going to prepay your house loan in full. However, the question of whether to prepay your loan or invest in order to earn higher returns cannot be answered without taking into account the profitability of both options, your existing financial condition, your capacity for risk, and other variables.

Choose wisely between loan tenure and EMI reduction

When thinking about prepayments on their loans, consumers have two options. They have two options: either lower their current EMIs or shorten the loan’s term. You can save more on interest payments by shortening the term of your loan. The decision between the two is also influenced by your money, though. In situations where their disposable income is being restricted by the rising rate of interest regime, many borrowers also think about lowering their EMI.

Stay away from emergency funds

Dealing with unforeseen financial emergencies like job loss or unexpected medical expenses is the emergency fund’s main goal. Utilizing your emergency fund to pay off your housing loan early may not only negate the objective of the fund but may also compel you to take out additional loans at a higher interest rate in the future if you experience another financial disaster. As a result, it is suggested that you make sure your emergency fund is well-stocked. Never think of using your emergency savings to make prepayments on your home loan.

Prepaying your housing loan might reduce your overall interest expense, but doing so by selling up your current investments or emergency savings can have a detrimental impact on your financial situation. Consider investing any extra money in fixed income securities like bonds and fixed deposits rather than using it to prepay your housing loan. You may also utilize the money that isn’t designated for any particular financial objective. 

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