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Should You Foreclose Your Home Loan?

By Sateesh Kalla - Jul 11,2019
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Foreclosure of a home loan is always a good option as it makes you financially debt-free, but there is always an optimal/intelligent methodology to go about the foreclosure of the loan that will be the least, to reduce your monetary impacts and save your money.

Never foreclose the home loan, only part-pay the loan.

Leave last few EMIs and pay them as regular EMIs. As last EMIs will have a lower component of interest and the same is applied at a diminishing rate, it means we are only paying principal component in the last EMIs. Thus, there is no benefit in paying the lump sum amount and foreclose the loan. The same can be invested in other high return investment options.

Illustration

Assumption Home Loan Amount: 25 lakhs

Assumption Tenor: 20 years

Assumption ROI: 8.8%

Leaving Last 12 EMIs Leaving Last 24 EMIs Leaving Last 36 EMIs
EMI Outflow 2,66,071/- 5,32,142/- 7,98,213/-
Principal outflow 2,53,649/- 4,86,153/- 6,99,140/-
Interest outflow 12,260/- 45,862/- 98,910/-
Invest Principal outflow in FD
Returns on FD – 6.5% (Post-tax) 16,487/- 65,254/- 1,45,386/-
Benefit 4227/- 19,392/- 46,476/-

As per the above illustration, for Rs 25 lakhs home loan for 20 years @ 8.8% rate of interest, there would be an overall saving of Rs. 46,000 if invested in an FD rather than put toward foreclosure/part payment of loan during the last 3 years of the loan tenor.

 

Home Loan EMI Calculator
 

You can make use of the Bajaj Finserv home loan calculator at Finserv MARKETS to help you with these calculations and arrive at a decision on whether you want to foreclose the loan.

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522