In its recent monetary policy meeting, RBI has decided to keep the repo rate unchanged at 4%. Resultantly, it had a significant effect on India’s overall credit market, and home loans being a portion of it, is also going to witness its outcomes.
Housing loans are typically high-value financial products with a long repayment tenor. Hence, any fluctuations in the interest rate can have a substantial effect on its instalments. However, to reduce this burden, one can opt for prepayment options and use a home loan prepayment calculator to find a solution to lower his/her overall credit.
Nonetheless, before going ahead with any prepayment plans, one must consider some crucial points to make this process beneficial.
6 points to consider before opting for a housing loan prepayment
- Check for additional charges
Prepayment of a home loan may include furnishing an additional amount, but it varies from one lender to another. Typically, credits with a floating rate of interests may not include such charges, but with a fixed interest rate may incur such charges. Nevertheless, before opting for the process, take into account the additional cost and if you are making any savings or not.
- Go for a reduced tenor, not EMIs
While opting for the prepayment facility, ensure that it reduces the loan tenor instead of the home loan EMIs. The reason being, it will help you to close your loan sooner and pay less interest. One can use online calculators to learn more about it and then go ahead with this process.
- Weigh in the tax benefits
Home loans allow borrowers to avail tax benefits on their annual interest and principal payment. Once a borrower prepays the principal amount, it reduces the overall debt and the tax benefits.
Therefore, while planning a prepayment, borrowers should know how to adjust the income tax exemption from other sources. Moreover, debtors can use a home loan prepayment calculator to find a way that will allow them to reduce their burden and get maximum tax benefits simultaneously.
- Emergency funds are not for prepayment
Financial experts often stress that to reduce the home loan burden, individuals must not use their emergency funds. Savings like these are to tackle any unavoidable financial crisis, and using them for prepayment can have adverse implications.
During such exigencies, one may have to opt for credit at a higher interest rate to manage that situation. Resultantly, it will put the previous efforts to reduce the financial burden into a vein.
- Credit report should reflect prepayments
Credit score and credit report play a huge role in securing any credit, as they represent a borrower’s creditworthiness.
Since prepayments denote an individual’s financial stability and capacity, it is ideal to ensure that such activities are reflected in the credit report. It will help borrowers to negotiate better home loan interest rates if they decide to opt for a balance transfer.
Home loan eligibility is another point that depends on the creditworthiness of a borrower, so it is essential to be mindful of that.
- Consider investing the same funds
Since prepayments require a lump sum amount, one can also consider investing the same amount for more earnings. In this regard, borrowers can compare the interest amount they save in the long term and the amount they can earn in that period if they invest the same.
Depending on this comparison, they can decide whether to opt for prepayment or not. A home loan prepayment calculator can be an effective device to help individuals make this decision.
Leading HFCs allow their customers to use such devices without paying charges. Moreover, the introduction of pre-approved offers has also helped existing borrowers further by streamlining the loan application process. It is applicable on financial products like home loans, loan against property, etc. Individuals can now easily check their pre-approved offers by submitting their essential contact details.
Home loan prepayment calculators are an excellent device that allows individuals to weigh in different possibilities of their repayment and find the savings they can make. Hence, one can make an informed decision.