When a borrower repays his Home Loan debt before the end of the tenor is called prepaying the Home Loan. A Home Loan prepayment can either be done entirely or in bits and pieces. This depends upon the mentality of a person. The basic idea behind prepayment of loan is to avail lower rate of interest through optional refinancing. Sometimes it so happens that a borrower receives a bulk amount and looks forward to pre-paying his loan thinking to get relieved from his outstanding loan. But is it a good choice? Is it a good idea to prepay a loan early?
Home Loan prepayment involves repayment of the loan before the tenor ends. Home Loans generally come with the life of around 15-20 years and can be extended to up to 30 years according to a person’s capability. Bank or an NBFC has to be informed about your decision of prepaying the loan. The banks and NBFCs charge prepayment penalties. Well, to get an approximate idea for the final amount you can use online Home Loan Part Pre-payment calculators that gives you the ability to check your amount.
RBI recently announced that the banks cannot charge a prepayment penalty on the rate of interest which is floating in nature. This has proved to be beneficial to the Home Loan borrowers. It’s a huge leap ahead as now you can even lodge a complaint regarding the same. After having understood this latest benefit provided by RBI let’s assess whether Home Loan pre-closures are beneficial or not.
Benefits of Home Loan Prepayment
- Savings come to rescue:
All the hard earned money that you save helps you get rid of the most stressful thing in your life. A prepayment might consume all of your savings but it’ll take away all the stress and pressure from you. Thus prepayment through savings can help you save a lot of money in the long-run.
- No penalty on floating rate of interest:
As mentioned earlier RBI announced that a person who is looking forward to Home Loan prepayment must not be penalized if the loan has been sanctioned on floating rate of interest.
- Massive savings:
Prepayment of loans will save you a lot in the long run. You not only become stress-free but you lift off a major burden from your shoulders. Thus you might be penalized up to 3-5% if your loan isn’t levied on a floating rate but that’s it. You’ll be able to save a lot of money in the long run. It’s better than paying 10-12% every month with the uncertainties attached to it.
Drawbacks of Home Loan Prepayment
- There’s No Tax Benefits:
If you opt for Home Loan prepayment, you won’t get tax benefits. Prepayment of the loan would relieve you of your dividend as well.
- Missing out on other investments:
If you have a decent amount of money available in your hands, opting for Home Loan prepayment is not a good idea as you might miss out on making bigger profits through equity funds.
One can consider the benefits and drawbacks of Home Loan prepayment and decides what matters the most. Any type of loan is a risk and includes stress. Getting rid of it is a good decision. On the contrary, if you have sufficient funds then investing that money in other medium is the better decision. Thus if you’re financially stable then it’s fine if you choose an alternate mode of investment instead of repaying the loan, on the contrary, if that’s not the case, the best option is to prepay the loan.
One important aspect which helps you to secure loans and get the benefit is that of having a good CIBIL score. It’ll help you in building trust with your bank as well as help you avail lower rate of interest as well.