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Tata Capital > Blog > Loan for Home > Top Things to keep in mind before prepaying your Home Loan

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Top Things to keep in mind before prepaying your Home Loan

Top Things to keep in mind before prepaying your Home Loan

Receiving extra money is always a good thing. There may come a time when you may receive some lump sum amount such as a bonus or incentive payment. You could also come across some family inheritance or make a windfall profit if you are a businessperson. However, your conundrum comes when you need to decide how to spend it.

If you have loans including home loans, you are in two minds whether to use the lump sum amount to prepay your housing loan or other loans or probably put to use elsewhere. “To prepay or not to prepay,” the classic Shakespearian dilemma will bother you.

Well, prepayment is a facility offered by financial institutions like Tata Capital, whereby you as a home loan borrower can prepay your home loan or other loans fully and complete the formalities of discharging your loan obligation to the lender. Lenders can also offer you part prepayment facility.

Intuitively, it makes a lot of sense to use the money to prepay and become debt free. But, is it as simple as that? Let’s find out from the following 7 factors that are before you, as well as what is prepayment of home loan and how to plan it effectively.

7 Factors to Know Before Opting for Prepayment

1. Prepayment comes with conditions:

Financial institutions like Tata Capital, imposes some conditions for prepayment home loan which could include charges and the number of times you can make the prepayment. For instance, it charges 2% plus taxes for prepayment on home loan balance transfer.

2. Effect of part prepayment on your loan:

If your lump sum amount is insufficient to foreclose your home loan you could consider making a part prepayment as per conditions. The advantage of part prepayment is to reduce your interest burden. For instance, if your principal outstanding is Rs 15 lakh and you want to part prepay Rs 8 lakh, your lender recasts the housing loan with Rs 7 lakh as the principal to be repaid and charges interest accordingly which would also cause a change in the EMI. In fact, part prepayment could be more advantageous if the prospects of an increase in interest rates in the future are high.

3. Which loan to close first?

If you are a person who has more than one type of loan – education loan, car loan, business loan or personal loan – you should try to use the lump sum amount to pay off the loan with the highest interest rate. Typically, personal loans and business loans, being unsecured loans, carry higher interest rates than secured loans such as car loans and home loans. So, it makes sense to clear off the personal loan first and if anything is left over you could consider part prepayment of your housing loan. You can check Home Loan interest rates on the Tata Capital website.

4. Effect on credit score:

Remember that the banks and financial institutions sends details of your home loan to the credit bureau, which uses the data to prepare a credit score for you. Since repayment history is an important factor for credit score part prepayment augurs well for your credit score. Ensure that this fact reflects in the credit score as sometimes delay in feeding information can be detrimental to you.

5. Alternate use of lump sum amount:

Making investment decisions is tricky and with the myriad possibilities for the investment, you find it difficult to choose. You could take the advice of finance professionals to help you make the decisions. One simple rule of thumb is to consider the possible return of your intended investments. If that return is higher than the interest rate you are paying on your home loan it may be better to invest in that instrument.

6. Tax benefits:

This is another area which may require the help of finance professionals. It works both ways. You could get tax benefits or you could lose tax benefits depending on the way you have structured your housing loan. You need to consult a tax professional and use the inputs to make a proper decision.

7. Timing:

Timing is a factor that affects your decision to prepay or not to repay. Another thumb rule is that in the initial part of the loan tenure, a prepayment is a good option. This is because you will pay a much lower interest amount on the reduced principal outstanding after prepayment. This also reduces home loan EMI. However, if you receive your lump sum amount during the later part of the loan tenure it may be better to use the funds elsewhere and allow the loan repayment to be discharged in the normal tenure. Make sure you check and choose the best EMI option.

There could be other factors besides the seven described above that could affect your decision to prepay or not to prepay. Tata Capital and other housing finance companies create their own conditions in accordance with RBI guidelines in respect to the prepayment. You should consider all of them and consult with finance and tax professionals before you make a decision one way or the other.

How to Calculate Prepayment Savings: A Step-by-Step Guide

To calculate savings through loan prepayment, a prepay home loan calculator is a convenient option. 

A home loan prepayment calculator is an online tool that helps you check whether making a prepayment on the loan is worthwhile. It can demonstrate how prepayment can reduce your loan burden. If you are thinking of choosing the prepayment option, these calculators help you understand how your loan changes in the following aspects:

  • The percentage or amount of EMI saved
  • The due EMI amount
  • The revised EMI after prepayment
  • The revised loan tenure

To use an online house loan prepayment calculator, you will need to enter a few details:

  • Prepayment home loan amount
  • Outstanding loan amount
  • Remaining loan tenure
  • Rate of interest

Once you enter this information, the calculator will show your total savings and how prepayment impacts your EMIs (for the remaining tenure). It also helps track the total prepayment made, empowering you to pick the right prepayment option.

Prepayment vs Investment: Comparing Returns

A common dilemma for a home loan borrower is whether to prepay the loan or consider other investment opportunities. Here is a list of things to consider, to make the decision:

  1. Long Term Finances

Start by thinking about your long-term finances and goals. Expenses like children’s education, family responsibilities, or retirement planning may require more liquidity going ahead. If you’re planning on prepayment home loan for the extra security, make sure your long-term finances are not significantly affected. Otherwise, investments can help you build wealth.

  1. Inflation and Tax Benefits

Inflation affects the value of your loan over time. Investments can offer returns that outgrow inflation.

On the other hand, home loans offer tax deductions (under Section 24 of the Income Tax Act, India). Consider whether your home loan can reduce your tax burden substantially.

  1. Prepayment Charges

Some lenders charge a fee for prepayment. Always review these costs before deciding.

  1. Investment Returns

Consider the trade-off: evaluate if investments can offer higher long-term returns than the interest saved through prepay home loan. 

In many cases, a balanced mix of partial prepayment and investing works best.

Step-by-Step Process to Prepay Your Home Loan

If you have assessed your financial situation, long-term goals, disadvantages and advantages of prepayment of home loan, and considered all options available at hand – and decided to prepay your home loan, here’s a simple guide to help you through it.

Step 1: Review loan agreement

Start by checking your loan documents for prepayment rules. Look for details on minimum prepayment amounts and applicable charges. Some lenders offer partial and full prepayment options too.

Step 2: Arrange funds

Ensure that you have funds available for the prepayment as well as emergency funds. Include all upcoming expenses like medical bills, education fees, and general living expenses.

Step 3: Contact lender

Next, contact your home loan lender about your intention to prepay home loan.

Most lenders will have prepayment clauses for penalties, limits, and the final impact on EMI and loan tenure. Your lender will explain the procedure, including any prepayment charges involved.

Step 4: Submit documents

Submit the required documents (identity proof, loan account details) as requested by your lender.

Step 5: Make the payment

Pay the prepayment amount using the approved payment mode. Afterwards, remember to collect an acknowledgement and updated loan statement with the revised EMI or loan tenure.

Conclusion

Prepaying your home loan can be a practical way to reduce loan burden, and get closer to a debt-free status. The final decision will depend on the interest rate of your home loan, the remaining tenure, prepayment home loan charges, and other related factors. Carefully thinking through your options and their ripple effects can help you make the right decision for your situation.

With Tata Capital’s flexible repayment options and competitive interest rates, planning your home loan becomes easier. You can also use the convenient EMI calculator to plan your loan payments wisely.

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FAQs

What are the typical prepayment charges for home loans in India?

Prepayment charges are usually not applicable on floating-rate home loans, as per RBI guidelines. For fixed-rate loans, lenders may charge a fee, which varies by bank and loan terms. It is best to check directly with your lender for exact charges and conditions.

Can I prepay my home loan without reducing my EMI tenure?

 

Yes, one of the advantages of prepayment of home loan is lenders allow you to either reduce your EMI or shorten the loan tenure. Reducing EMI helps with monthly cash flow. On the flip side reducing tenure leads to higher interest savings, and faster loan closure.

How much can I save in interest by prepaying my home loan?

 

Prepay home loan reduces the outstanding principal, which lowers the interest charged over time. Even small prepayments, especially in the early years, can result in savings on your home loan. To estimate exact savings, you can use an online home loan prepayment calculator with your loan details.

Is prepaying a home loan better than investing the surplus amount?

 

Deciding between prepayment home loan and investment can have nuance. If your loan interest rate is higher than expected investment returns, prepayment may be better. However, if investments offer higher returns and you value that wealth growth, investing could be more suitable for your situation.

What documents are required to prepay a home loan?

 

To prepay home loan, you typically need your loan account details, valid identity proof, and a prepayment request form. Some lenders may also ask for updated bank statements or additional documents, depending on their internal policies. Check with your lender to get the exact list.

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