Is it a good idea to pay off your Home Loan early?
A house fulfils a basic requirement: it provides a place to reside. It also creates a sense of financial stability because, in most circumstances, its value improves over time. Borrowers might also profit from tax advantages when they take out a house loan. Not to mention the psychological benefits of owning a house. These are some of the reasons why most individuals are ready to put money into a property and take up a long-term mortgage. Partially prepaying your house loan and being debt-free may, nevertheless, be a good idea at times. Consider the following factors before deciding whether or not to prepay your mortgage: The interest rate — The interest rate you are now paying on your home loan should be competitive and should not put you in a financial bind. Prepaying your house loan makes sense if you can save money on interest. A penny saved is a penny earned, after all! The length of time your house loan is due to be paid off - Check how many months or years are left until your house loan is due to be paid off. The larger the overall interest amount payable, the longer the remaining term of your house loan. Prepaying the house loan would be advantageous in this situation, especially because interest rates are going to rise in the economy. Prepaying the Home Loan, on the other hand, may not make sense if the term is only a few years or months long and interest rates are predicted to remain steady. The biggest benefit should be obvious from the interest savings that may be possible over the loan's remaining term. Other debts - If you have any other outstanding loans, such as a personal loan or credit card debt, it's a good idea to pay them off first because they have a higher interest rate than your Home Loan. The EMI load - When purchasing your dream house, many of you may exceed your budget in the hope that your salary will increase in the future, allowing you to cover greater EMIs with ease. However, if an unexpected event occurs, such as a job loss or a wage decrease, the EMI on your house loan (and other debts) may become a hardship. Prepaying a house loan in this circumstance might be difficult. However, if you have a strong job and receive annual raises, it makes sense to save and partially payback your house loan, lowering your debt load. Your overall loan EMIs should not be more than 40-50 percent of your Net Take Home (NTH) salary. How much can you make by investing the money saved - The entire cost of partially prepaying the house loan should be compared against the possible returns on the money saved by investing it. Prepayment may be advantageous if there is a chance to make a better return (post-tax) than the interest on the house loan you are paying, and interest rates are projected to rise, as long as the remaining loan term is long. If, on the other hand, you're approaching the end of your house loan term, interest rates are projected to remain stable, and there aren't any appealing investment prospects, prepaying the loan would be pointless, since you'd miss out on the tax advantage as well. Tax implications - The principle component of the house loan EMI is deductible under Section 80C up to a maximum of Rs 1.50 lakh per financial year. If the property is a Self-Occupied Property (SOP under Section 24(b)), the interest can be deducted up to $2 lakh. As a result, you must consider the tax benefit you would lose if you partially prepay your mortgage. Use Axis Bank's House Loan Tax Saving Calculator to estimate how much money you'll save on your taxes if you take out a home loan. Your other financial objectives - A house is only one of many financial goals, including saving for your child's school and wedding expenditures, a family trip, a car, and retirement. To achieve all of these objectives, you'll need to set aside funds. As a result, avoid sacrificing other aspirations in order to pay off your mortgage. Are there any fees associated with prepaying a portion of your house loan? The RBI's current guidelines state that a bank cannot levy a fee for part-prepayment or foreclosure of a Floating Rate Home Loan. If your loan is a Fixed Rate Home Loan, however, the bank will charge you a prepayment penalty of about 2%. When considering whether or not to partially prepay your house loan, consider all of the factors. In the end, the advantages should outweigh the costs of partial prepayment.