Being debt-free is overwhelming for homeowners. But, it is challenging to achieve.
Every borrower faces the dilemma of prepaying their home loan or use the additional funds received as a bonus in investments. Generally, a home loan is one of the biggest loans an individual might avail of during their lifetime.
Making part-prepayments along with regular EMIs is always a good idea. It helps to reduce the total interest due and become debt-free faster. Moreover, now that banks do not levy any prepayment charges on floating loans, it is more beneficial for borrowers.
What is home loan prepayment?
Prepayment refers to the process of paying your home loan earlier, either in full or in part. Prepayment is a wise decision when you have some extra funds. You can pay your EMI dues with these spare funds before the stipulated loan tenure.
Paying only a part of your housing loan before time is also quite beneficial. It allows you to save on your home loan interest rates and reduce the next EMI amount.
But, before you decide on whether you should use the additional funds to make a part prepayment or invest in saving plans, there are multiple factors that you need to consider. These include the remaining tenure, home loan interest rates, rate of return from the investment, principal repayment, tax benefit forgone on interest, and more.
Quick facts about prepayment charges
Banks or lenders charge a prepayment penalty if the borrower pays the mortgage within a certain time. This clause is mentioned in the mortgage contract. The penalty amount is a percent of the outstanding mortgage amount or three months of interest. The penalty charges vary from lender to lender.
- Why do banks charge prepayment charges?
Lenders charge home loan interest rates. If borrowers repay the outstanding sum before the tenure ends, the borrower no longer pays interest. This is a loss to the lender. Thus, as compensation, the bank levies a prepayment penalty on the borrower.
- Why do borrowers consider paying the outstanding amount before maturity?
Market interest rates frequently fluctuate. Most borrowers opt for a fixed-interest loan. But, when they see that the interest rates are falling, they want to refinance their loan. They try to transfer the loan to another lender that offers a lesser rate of interest. The new lender transfers the funds to the existing lender. Since the existing lender has lost on the rate of interest it would have earned otherwise, it charges a prepayment penalty.
The home loan EMI calculator makes it easier for you to estimate how your EMI amount will change with the new interest rate.
To qualify for a housing loan, you need to meet the home loan eligibility criteria. The criteria help to verify that you can repay the loan amount without defaulting. If you fail to meet the eligibility criteria, your loan application can be rejected. This rejection negatively impacts your credit profile. Thus, make sure you check the application process and complete it with care.