A home that you can call your own is everyone’s dream. Like many others, you may have also taken a housing loan to fulfil this dream. Given the hefty interest rates and long repayment tenure, the equated monthly instalment (EMI) would have substantially increased your monthly outgo.
It is prudent to start planning how you can prepay your home loan without waiting for its term to end. Here are a few tips that will help you. As you will note, it pays to keep some of these in mind even when you pick a lender.
Plan prepayment
When you take a home loan, please ensure that the EMI will not become an unmanageable burden. In other words, you should be able to manage your monthly expenses even after you pay the EMI. On receiving a bonus or a salary hike, plan to make a prepayment against your home loan before you spend it on anything else. When you prepay, request your lender to reduce the tenure and not the EMI. Not only will you repay your loan sooner, but you will also save on interest.
Avoid prepayment charges
Is your loan’s interest rate fixed or floating? Lenders who charge a fixed interest do charge a fee if you prepay, while those who levy a floating rate, don’t. Try and pick a lender whose prepayment fee is nil or the least.
Ensure prepayment boosts credit score
Loan prepayment gives a significant boost to your credit score as it indicates you can meet your current financial obligations and your financial health is good. The Credit Information Bureau (India) Limited (CIBIL) is the most popular of the credit information companies licensed by Reserve Bank of India. Ensure your lender sends the prepayment to you and CIBIL. Your CIBIL score update might take about 45 to 60 days to figure in your report. Do check regularly to ensure it does appear.
When not to prepay
Prepayment may not always be the best option. Calculate the interest you will save by prepaying and compare it with the potential earning if you were to invest the same amount elsewhere while leaving the loan as is. If it appears that you will be making a substantial earning by investing, then go ahead and invest the amount instead of prepaying. The idea is to get the best benefit out of the lumpsum amount that you have.
Also, home loans offer considerable tax benefits by allowing you to claim deductions on both the principal and interest. These benefits will reduce or disappear when you make a prepayment. You may not want to prepay unless you have alternative investments in place to save tax.