Making pre-payments on home loans can reduce your overall loan burden. But, pre-payments are not only about making an extra payment whenever your finances permit. You should carefully deliberate your decision of prepaying your home loan so that you can gain a stronger financial command.
Given below are some factors that you should consider before pre-paying.
Ensure your prepayments reflect in your credit report
Being able to make prepayment on your home loan is a sign of financial fitness. It shows that you are equipped to deal with your existing financial obligations while handling your daily expenses. Your repayment history is an important factor for your credit score. The reduced home loan obligation will create a positive implication on your credit score, thus improving your creditworthiness. Hence, your prepayment should be documented in your credit score. Financial Institutions send details of your home loan to the credit bureau, so make sure to apply for a CIBIL report once in three months to check for updates.
Choose wisely between EMI reduction and loan tenure
While considering home loan pre-payments, you can choose to either reduce your home loan tenure or bring down your existing EMIs. If you choose to reduce your loan tenure then you will be able to close your loan quicker and also save more in interest payout. But if your income is being burdened by the increasing home loan interest rate regime then you can also consider bringing down your EMI as per your needs. In this case, you must ask your lender not to reduce the tenure but to instead reduce your EMI.
Effects of part pre-payment
If your sum amount is not adequate to foreclose your home loan, you could consider making a part pre-payment. Part pre-payment can be quite beneficial if you are looking to reduce your interest burden. Once you have prepaid a part of your home loan, your lender can recast the leftover housing loan amount as principal amount and charge interest accordingly. This would cause a change in your EMI. Moreover, part pre-payment can be advantageous if the interest rates are more likely to increase in the future.
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Impact on tax
If you are considering pre-paying your home loan, make sure to be aware of the tax benefits you could gain or lose, depending on the way you have structured your home loan. To make a well-informed decision, consult a tax professional and use their inputs to come to a decision.
Whether you should prepay or not, this decision depends on your timing. If you decide to pre-pay with a large sum of money during the initial part of your loan tenure then it’s a good option. This is because you will pay much lower interest on the reduced principal amount after the pre-payment. This will also reduce your EMI. But, if you want to pre-pay during the later part of the loan tenure then it might be best to allow the repayment to be discharged in your normal tenure. Rather than using the extra funds to repay, it will be more beneficial if you used the amount somewhere else.
Tata Capital is known to offer easy housing loans at attractive home loan interest rates. Tata Capital has its home loan pre-payment conditions as per RBI guidelines. You should consider all of them before you make your final decision.
When taking home loans from Tata Capital, check your home loan eligibility and monthly payments with our home loan EMI calculator to be aware of your housing needs. Our home loan calculator can help you get an estimate of the EMI which will help you in sorting out your finances.
Additional Read:- Common Myths About Home Loan
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