Home loan prepayment is a great tool to close the housing loan early, save interest outgo and reduce the EMI obligation.
It may seem challenging to pay back your home loan before its actual tenure. However, if you carefully plan and use your disposable income, you can easily accomplish it. Prepayments are an excellent way to pay off a house loan early, lower EMI payments, and save on interest costs. Existing borrowers with surpluses may also think about pre-paying their loans in order to cover the recent sharp hikes in home loan interest rates.
There are two ways to close our home loan early. You can either prepay the entire outstanding home loan or partially prepay.
- A full prepayment or foreclosure means complete prepayment of the outstanding loan amount.
- Partial prepayment allows paying a portion of the outstanding loan amount once or multiple times during the loan tenure.
Here are some of the points that borrowers should keep in mind while prepaying their home loans:
- EMI reduction choice or tenure
Home loan customers have two choices when prepaying their loans: they can choose to shorten their loan's term or reduce their EMI. While choosing the duration reduction option would result in greater overall interest expense savings, the borrower's disposable income would increase as a result of the EMI reduction choice.The borrower should prioritise either lowering the EMI burden to deal with rising interest rates or lowering the total interest for the loan when deciding between the two possibilities.
- Compare savings from home loan balance transfers
Home loan balance transfer (HLBT) facility allows existing borrowers to transfer their home loans to other lenders at lower interest rates. The reduced interest rate that would be available if this facility were to be used would cut the overall cost of interest without having an effect on the borrower's liquidity or existing investments. Therefore, current borrowers should look into the potential savings of moving their loans to lenders with much cheaper interest rates.
- Never pay off loans early using your emergency savings
The main goal of keeping an emergency fund is to deal with cash shortages and/or pay for inevitable obligations such ongoing EMIs, rent, insurance premiums, children's tuition, etc. due to income loss. A sufficient emergency fund should ideally be big enough to cover all of your costs for at least six months.
- Do not redeem investments intended for important financial goals
Most home loan borrowers often redeem their existing investments earmarked for major financial goals to make prepayments. However, doing so may have a negative influence on their long-term financial health and liquidity and may cause them to take out more expensive loans in order to attain their important financial objectives.
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 "Planning to prepay your home loan? Here are a few things that you should keep in mind")
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