When home loan debtors receive an annual bonus or lump sum payment, they are faced with a dilemma. Either they prepay their home loan or invest and save that money elsewhere. According to experts, it is wise to prepay your home loan but the decision has its own pros and cons. Big financial goals can be achieved with a bonus or lump sum payment. But lowering your home loan debt earlier can let you focus on meeting other financial needs. So delve into the pros and cons of prepaying your home loan:
Avoid repayment defaults in the bad times
By paying off a part payment of home loans earlier, you are saving yourself repayment defaults in a bad economic period. This benefit of home loan prepayment prevents the need to use your savings to avoid defaulting. Experts recommend paying off your debt earlier to avoid trouble from a possible unfortunate event in the future. It is based on a sound principle – the earlier the better. As the years go by, big financial responsibilities are unavoidable, so it makes sense to just pay off parts of your home loan at the earliest.
Shortened Tenure Length
When you finish a part payment of home loans and maintain the same EMI, the tenure period falls accordingly. A wise approach is to shorten the tenure rather than reduce your EMI. With a reduced tenure, you can also enjoy other benefits of home loan prepayments like saving interest payments, lowering the principal, financial stability, and maintaining a good credit score.
Reduces your EMIs
Prepaying your home loan can reduce your monthly EMIs if you choose to. This benefit of home loan prepayments kicks off when you pay off a large amount you owe. With a larger part payment of home loans, you have the option to fit your EMIs to changed financial situations. You can also increase the EMIs if you just got a salary raise and finish the repayment process faster, provided you do not reduce your tenure period.
Owning your own house debt-free means other house payments
Many want to own their house debt-free but that comes with lots of other expenses. Once you pay off your home loan, a home loan prepayment disadvantage is expenses such as property taxes, insurance, and annual maintenance. Expenses will always come up and they won’t come cheap so it means trouble maintaining good cash flows.
Banks and HFCs issue prepayment charges or penalties if you prepay your home loan. This is because some loans are designed to let the lending institutions earn revenues from interest payments. By prepaying your home loan, the bank bears a loss, especially if the loan has a fixed rate or if interest rates are declining. Prepayment charges between 2-4% on outstanding amounts are a major home loan prepayment disadvantage. But it is set as a safeguard for banks from potential losses from prepayment or to prevent customers from switching their loan to another bank. On Finserv MARKETS, borrowers are not charged any extra fees for home loan prepayments and can handily carry out prepayment on the online customer portal. In addition to that, on Finserv MARKETS, you can handily avail home loans of up to Rs. 3.5 crore on Finserv MARKETS and avail benefits like lightning quick disbursals and approvals, minimal documentation and zero collateral requirements.
Lose out tax benefits
Losing out on tax benefits is a major home loan prepayment disadvantage. If you have a self-occupied house, you claim interest payments as deductions in a financial year up to INR 2 lakhs. If it’s your first home, you get an additional deduction of INR 50,000 on your interest. You even get deductions on principal repayments up to INR 1.5 lakhs. By making part payments of home loans, you will see lower amounts of tax deductions at the end of the year.
Less money to put in other lucrative investments
When you receive a big bonus or lump-sum payment, the second option for you is investing that money in lucrative securities. It should make you seriously reconsider paying off big parts of your loan amount. Choosing to make a part payment of home loans when you’re financially stable leaves you with a huge home loan prepayment disadvantage. You miss out on making huge returns elsewhere to help you meet big financial goals. You can get average return rates between 5-8% on investments such as mutual funds, stocks, or debt products to earn over lakhs in 10 year periods.
If you have fewer savings and a big loan on your head, no matter the situation, you’re better off carrying your loan and having savings. By prepaying your home loan, you face the major home loan prepayment disadvantage of lower savings. You are better off having access to more savings when needed rather than getting rid of a big part payment on home loans.
Overall, prepaying your home comes with a bunch of benefits. But considering the disadvantages, you are better off making a sound decision based on your financial situation. You could lose out on possible higher returns from investing the money in lucrative activities or just having a bigger emergency fund for the future. Overall, weigh the pros and cons coming with this big prepayment if you just got a big bonus, especially if you have big financial goals to achieve in the next 5-10 years. Do that and you will choose a wise approach for yourself.
If you are planning on buying a new house and need a decent flexible home loan, check out Finserv MARKETS. On Finserv MARKETS, you can avail loans of up to Rs. 3.5 crores with one of the lowest interest rates of 6.93%. You can also reduce your EMIs if you transfer your existing home loan to them. They also offer a property dossier to guide you through the legal and financial aspects of owning a new property alongside online management facilities and customised insurance schemes.
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