Taking out a home loan is one of the most popular financing options for those looking forward to buying a house. The loan amount, your EMIs, your loan term, etc. depend on several factors, including your age, income, and other eligibility criteria. However, once you get your home loan approved, paying it back at the earliest stays at the back of your head all the time. Whenever you get some extra income, as a promotion, hike, or gift, the first thing that comes to your mind is to use the money towards your loan repayment. The more you pay, the lesser interest amount and smaller EMIs you will have to pay, and the faster you will be able to get rid of your loan.
Paying off your liabilities quickly is definitely a smart move. But remember, pre-paying your loan is not always the best thing to do. Before you decide whether to pre-pay your home loan or not, here are a few things to consider carefully.
Questions to Ask
Before you pre-pay your home loan, here are a few questions you must ask yourself:
- How old is the loan?
- How much are you saving in taxes?
- Are you finding it difficult to repay your EMIs on time?
- Can you get a bigger benefit if you invest the surplus money in a good investment plan?
Just because you have additional funds doesn’t mean that you should rush into pre-paying your home loan as quickly as possible. That’s not always the best thing to do. Here are a few do’s and don’ts you must keep in mind before you consider home loan pre-payment.
Stay Within Your Budget
Before you pre-pay your loan, consider your needs and budget first. Your loan amount depends on whether you have purchased an apartment, an independent unit, or a condo. If you spend all the money you got into pre-paying the home loan, you may face inconveniences with other expenses. Instead of pre-paying the loan, you may invest that amount in a better investment plan and earn greater benefits.
Be Careful While Choosing a Loan Plan
Although this step is meant to be considered at the time of home loan application, it is equally applicable while considering loan pre-payment as well. For instance, if you know that you are due for an appraisal and you are aware that you can increase your EMIs in some time, you must choose a lender with a hassle-free procedure instead of the one that levies extra charges for loan pre-payment.
Consider the Tax Benefits
When you apply for a home loan, you get tax benefits under government schemes like However, if you pre-pay your home loan, you may lose some of those benefits. So, calculate and evaluate both the aspects and decide if pre-paying the loan is worth losing the tax benefits.
Make the Wise Choice
When you offer to pre-pay your loan, you get two options: either reduce your EMI amount or reduce your loan tenure. Whichever choice you make, your ultimate goal should be to be align this EMI with the rest of your EMIs. You must be comfortable with the amount of EMIs until you repay the loan in full. Ideally, your EMIs should not exceed 30-40% of your monthly income.
Pre-Pay Early in the Loan
When you decide to pre-pay your loan, the ultimate goal is to reduce the interest rate and reduce your EMIs. So, you get the most benefit if you pre-pay your loan when it’s new. If you have already paid it for years and just a few years are left, you will not get much benefit from pre-paying it. So, if you have plans to pre-pay your home loan, try doing that at the beginning of your loan tenure instead of towards the end, because then your benefits will be substantial and you will be able to save a good amount.
Find the Right Balance
Getting rid of all debts is bliss, but it’s not that easy to achieve. It’s important to find the right balance and be mindful that you must have proper funds for emergencies as well. If you have got some extra funds, keep them saved for emergencies instead of pre-paying the loan. On the other hand, if you have already built enough emergency funds, you may utilize the money towards home loan pre-payment.
Calculate the Benefits
Calculate the returns you will get from investing your extra cash in some other financial asset instead of pre-paying your loan. While comparing, you may realize that home loan pre-payment is not the best alternative available.
Pre-Pay the Entire Loan
Instead of pre-paying the entire loan at the first chance available, you must consider partial loan repayments. You may start with small pre-payments and gradually make your way up.
Overlook the Interest Saved
If the interest saved is less than the benefit you may get by investing in another investment plan, you should not disturb your ongoing tenure and look for other alternatives.
Ignore the Acknowledgement
Once you make a home loan pre-payment, don’t forget to get its receipt, as it would be a written proof for the transaction of pre-payment.
With the information mentioned above, you can make a well-informed decision about whether you should pre-pay your home loan or not. Remember, an informed choice is a smart choice!
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