Dos and Don'ts of Home Loan Prepayment

Featured Image Caption: Home Loan Prepayment Tips

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Summary –

Do you have a Home Loan account which you want to prepay faster? Read on to know more!

Mr. Ankush Bhatia, a resident of Jalandhar Punjab, and a Marketing Executive by profession had availed a Home Loan from a leading online lender 2 years back.

Everything was going good, and he was also repaying the Home Loan in EMIs each month. However, a major portion of his income was going towards the payment of EMIs and hampering other major financial decisions and goals of his life.

The tenor of his Home Loan was 18 years, and he was concerned if he had to wait for 18 long years to focus on other goals.

He discussed it with one of his friends who had also availed a Home Loan for a tenor of 15 years. But, his friend looked relaxed because he had a good repayment strategy other than only relying on Home Loan EMI payments. Yes, he told Ankush to make prepayment so that he could reduce the principal, save money and close it earlier.

He also told him to use a Home Loan prepayment calculator to calculate how much he will save if he paid some extra amount and reduced the principal.

If you are also concerned like Mr. Ankush, even you could use a Home Loan prepayment calculator to know how much you can save on EMIs.

Let’s provide you some easy ways to prepay a Home Loan faster.

1. Increase the EMI with a Salary Hike

Lenders fix your Home Loan EMI as 40-50% of the total take-home salary at the time of the loan approval. However, with an increase in the salary each year, the ratio keeps going down. Hence, to prepay a Home Loan faster, you should maintain the discipline. Thus, to prepay a Home Loan faster, it is advisable to tune EMI ration with a hike in the salary. By maintaining it, you can prepay the Home Loan much faster than your expectations.

2. Use your Annual Bonus

Some people also avail a bonus of around Rs.5-10 lakh which they use on taking an overseas vacation and fulfilling other desires. Thus, if you are serving a higher amount of Home Loan, you can use your annual bonus to prepay the Home Loan. Doing this will help you reduce the interest burden and principal amount and close the loan faster.

3. Investments

How come investment can help prepay your Home Loans? Yes, it can unless you have invested in an investment vehicle offering you an ROI/interest rate greater than the Home Loan rates. Yes, if you are sure that certain investment tools such as Fixed deposits, PPF, Mutual funds, Stocks, Bonds or Equities will offer a good ROI, you are good to go! Nonetheless, some of these investments’ ROI is not fixed and regulated by market conditions which means the expected profits are not sure-shot. Thus, invest only in a tool that offers fixed returns so that it makes sense to use the ROI to prepay the Home Loan.

When should you Prepay a Home Loan?

You should know that during the initial phase of the Home Loan, the interest structure overshadow principal payment. On the other hand, principal payment is more when pitted against interest payment.

Thus, the thumb rule says that prepayment of the Home Loan is more financially beneficial during the first 7 years. However, before taking any decision, you should do an in-depth cost-benefit analysis or consult a known financial expert to bail you out!

The Bottom Line

If you have the required affordability to prepay a Home Loan and bring down its cost overall, you should do it so that you can focus on fulfilling other financial goals! Happy Home Loan prepayment!