Just purchased your first house and are thinking about prepaying your home loan? If that’s the case, then you should definitely continue reading this article before making a decision. In this piece, we will take you through the costs involved and the benefits of prepaying your home loan, and some other factors that will be critical in making your decision.

• The benefits of prepaying your home loan:

1. Peace of mind: Many people often experience stress and anxiety when thinking about paying off the long EMIs associated with a home loan; some loans which may  continue till their retirement (and maybe even beyond!). These emotions seem justified when you think about what happens if there is a job loss, a serious illness or the death of the earning member, and other similar situations. In such situations or worry about an uncertain future ,prepayment can lift a heavy burden off their mind.
2. Money saved on interest: You can claim interest deductions upto Rs 2 lakhs/Annum under sec 24 E. However ,if you have opted for a new tax structure this benefit will not be available.  Hence keeping this in mind , if you have additional money available , you can consider making higher payments towards principal and reduce your interest cost based on your tax structure.

• The disadvantages of prepaying your home loan:

1. Deterrence to short-term goals: A sound body and mind are essential to financial planning. Prepaying your home loan using the extra money from increments, bonuses, savings or returns on other investments can see you forfeiting many short-term goals and liquidity in your portfolio .For example purchasing a new car, planning for a vacation, a gym membership or even the rare occasions of splurging contribute positively towards your all round well-being.
2. Inefficient allocation of funds: If  your  principal and interest payment qualify for tax deductions entirely, it would make more sense to allocate your excess funds towards other asset classes. By continuing to pay the required EMIs, you will have a larger portion of your income and bonuses available to set aside towards investments and savings. So, by not prepaying your home loan and increasing your investments towards a tax efficient portfolio,you can see your corpus growing faster, and more goals being realized sooner. 

• A few more considerations:

Apart from the advantages and disadvantages of prepaying your home loan, there are a few other points that will help you clarify your decision.

1. Clear other loans and pending debt first: If you have any other form of debt, like an educational loan, a personal loan or an unpaid credit card bill, clear these first due to higher interest cost. Focus on clearing these loans on priority first before taking any decisions on prepayment of home loan
2. Do you have sufficient savings to meet your other long term and short term goals?: The EMIs on your home loan can be seen as a substitute for rent you would have paid otherwise. In this sense, you should ensure that your savings are not affected by your decision to prepay – which may go on to affect your short-term and long-term goals, including your retirement.
3. Don’t forego an emergency fund: Many people forget to maintain a contingency supply of cash for the purpose of an accident or an emergency. So before you decide to prepay your home loan, ensure that you have set aside an amount of 3-6 times your monthly expenses, primarily composed of liquid funds, to be used in the case of any contingency or loss of job etc; since, they require immediate attention. 

It is important to consider all these factors before deciding on your prepayment towards home loan or foreclosure of home loan . Suppose your portfolio is multifaceted, with investments in diverse asset classes, it would be in your best interest to consult a certified and experienced financial planner or wealth management firm before making a decision. Seeking professional advice can provide you with a much needed perspective, to help you break down the outcomes of prepaying your home loan in terms of the complexity of your financial plan.