A home loan can help you to buy your dream house. But once you have availed a home loan, and then receive an additional income through annual bonus or any other lump sum payment, you might wonder about making a home loan part payment. Typically, there is zero/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 part payment, 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 is a better option? Well there is no rule of thumb, and you must consider a wide array of factors before zeroing in on any decision.
Industry experts suggest considering the following key variables before making a decision:
Rate of interest on your home loan
The tenure left on your existing home loan
Rate of return from your preferred investment
The tax-benefit you stand to lose from home loan prepayment; both for the principal and interest amount
After considering the above-mentioned factors, you must understand that there could be specific scenarios where you stand to benefit from home loan part payment. Here is a look :
1. When the rate of returns on your preferred investment is lower :
In a situation where the returns from your preferred investment is lower than the savings you make from home loan part payment, then it is advisable to decide for making the prepayment.
For instance, if you have availed a home loan of Rs. 50 Lakhs at the interest rate of 8% for a tenure of 240 months (20 years), then you will have to pay a total of around Rs. 1 crore, including over Rs. 50.37 Lakhs as interest payment. Your EMIs will be Rs. 41,822. If you make a home loan part payment of Rs. 5 Lakhs at the end of the fifth year (60 months), you will save an interest repayment of around Rs. 9.72 Lakhs over the entire loan tenure. Now if you were to instead invest the home loan prepayment amount of Rs. 5 Lakhs for 15 years, in a fixed deposit with existing rate of returns as 5.5% , you will receive around Rs. 6.38 Lakhs as the interest amount. You should also remember that the interest amount received - in case of fixed deposits - is completely taxable. This will further deplete your total earnings from the investment. Thus, in this scenario it is worthwhile to make home loan prepayment.
Alongside, considering the existing market situation is also of paramount importance. For example in 2020, because of the pandemic, interest rates on fixed income instruments have plummeted, while investment in high-risk instruments such as stocks and securities remain highly volatile. Amidst such a scenario, you can benefit from home loan part payment.
2. When you have a high credit utilization ratio :
Typically, your salary along with other perks will increase each year. You must have considered this key aspect while availing a home loan. There could also be a scenario, where, in sync with your previous salary revisions, you had calculated your future financial capabilities on home loan repayments. This would mean that you availed higher EMIs. Remember, higher EMIs mean a higher credit utilization ratio.
But in the present scenario, due to the pandemic and lockdowns, companies are adopting cost-cutting measures, like salary-cuts and layoffs. If you had previously availed a home loan with high EMIs, industry experts suggest making home loan part payment to reduce your credit utilization ratio, besides remaining prepared for any financial losses due to salary decrements. Typically, experts suggest limiting the EMIs to anything between 30% and 40% of your take-home income each month. If you are above the optimum level of credit utilization, you can take the decision to make home loan part payment.
Thus, there can be specific situations when home loan prepayment can prove advantageous. You should always try to strike the right balance, when it comes to managing your debt obligations vis-a-vis your overall financial health. Along with selecting the right home loan, you must also consider having an emergency fund to protect yourself from a bad economic period. If you are looking forward to buying your dream home, you can choose from the best home loans, available on Finserv MARKETS. The process of getting the loan is quick, hassle-free, and sans any cumbersome paperwork. Along with availing a home loan, Finserv MARKETS also allows for repayment tenures up to 360 months. With such manifold benefits, why look elsewhere?
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