A home loan can help you to buy your dream house. However, since home loans usually have a longer tenure (up to 30 years) than most other types of loans, they do increase your financial obligations for a really long period of time. Therefore, at any point during the tenure of the loan, if you have surplus cash, you might want to repay the loan amount, either partly or foreclose the loan completely.
Typically, there is a minimal penalty for part or complete home loan prepayment, and opting for this alternative might ease your debt obligations considerably. But making the decision is not an easy task. Instead of using the money for home loan prepayment, you might also consider investing it in a suitable financial instrument to get long-term returns. This, in turn, can help you realise your financial goals. Which option is better? Well, there is no straightforward answer, and you must consider a wide array of factors before zeroing in on any decision.
Stay Away From Your Emergency Fund: Your emergency fund is for emergencies, and as a rule of thumb, you must not disturb your emergency fund neither for making an investment nor for prepaying your home loan, or for that matter, any other loan. Utilising your emergency fund to prepay your home loan would defeat the very purpose of the fund and make you financially vulnerable.
Never Redeem Your Existing Investments Set Aside for Your Financial Goals: If you are saving for an important financial milestone in the future, say your children’s higher education or marriage, it is advisable to not use the fund for any other purpose. It is so because you might not get the same returns on the investments you would be making in future and as a result the financial goal you were saving for might suffer.
Choose Wisely Between Loan Tenure and EMI Reduction: If you opt for partial prepayment of home loan, you usually have two options- either reduce the house loan EMIs for the future or reduce the tenure of the loan. While reducing the tenure might save you on the interest amount, reducing the EMI amount would increase your financial liquidity as you would have more cash to spend every month. Therefore, you must make a choice between the two options considering your monthly spends and future financial responsibilities.
Evaluate and Compare Your Savings Through Home Loan Balance Transfer (HLBT): Before you make up your mind about prepaying your home loan, it is advisable to check if you can transfer your outstanding amount to another lender who is willing to offer a lower house loan interest rate. This way you would be saving the interest amount without making any additional prepayment.
Take the Returns Derived from Your Current Investments into Consideration: Most financial instruments that offer fixed returns, such as bank fixed deposits, bonds, debt funds, etc. usually offer a rate of interest that is much lower than what your bank levies on your home loan. Therefore, if you have any surplus amount in any such fixed return product, you can consider utilising the amount to either partly prepay or completely foreclose your home loan.
As discussed above, choosing to prepay your home loan can prove advantageous in certain situations. You should always try to strike the right balance when it comes to managing your debt obligations vis-a-vis your overall financial health.
If you are considering buying a new house, you can choose from the home loan offers from various partner lenders on Bajaj MARKETS. The process of getting the loan is quick, hassle-free, and sans any cumbersome paperwork. Along with attractive interest rates, Bajaj MARKETS also allows for comfortable repayment tenures of up to 360 months. With such manifold benefits, why look elsewhere?