Thinking of prepaying your home loan? Things you should keep in mind

If home-owners have received a bonus, they may consider investing it in the capital markets instead of prepaying the loan

BS Web Team New Delhi
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Home Loan. Photo: Shutterstock

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Buying a house constitutes a big financial decision. One way home-owners can save money is to prepay their home loans early. Home-owners can prepay the entire amount or a portion of it. Prepaying home loans can save home-owners money on interest payments. However, there are contrasting views on this as well. 
Archit Gupta, founder and CEO, Clear, told Mint that the interest component of a home loan is higher in the initial years and decreases towards the end of the loan tenure. If home-owners prepay their home loan, the amount will be used to repay the principal amount. The interest for the next month will be calculated on the outstanding principal amount. Prepaying home loans can significantly reduce the interest component of such loan and help home-owners pay their loan early.

According to Gaurav Kapoor, director and co-founder, Fincorpit Consulting, when home-owners prepay their home loan, the interest will only be calculated on the remaining principal amount. This means that home-owners will pay less interest overall and the loan will be paid off sooner.Kapoor also said that prepaying home loans can help home-owners pay off the loans sooner than they originally thought. This is because the interest will be calculated on the remaining principal amount after each prepayment. Additionally, he suggested that regular micro prepayments are the best option, as they can be automatically deducted from home-owners bank accounts. This can help home-owners stay on track with their prepayment schedule and save even more money on interest.
Home-owners may consider prepaying their home loan if they have the financial means to do so. For example, home-owners could prepay their loan if home-owners receive a windfall, such as a bonus or inheritance. Additionally, banks and non-banking financial companies (NBFCs) do not charge a prepayment penalty on floating-rate home loans.

Archit Gupta, founder and CEO of ClearTax, told Mint that if home-owners have a large home loan balance or the bank is charging home-owners a higher interest rate, it may be a good idea to prepay their loan. However, if the bank is charging home-owners a lower interest rate and if they can claim significant tax benefits on their home loan principal and interest, then may want to continue with their loan.
Pratik Daudkhane, co-founder at Decentro, said that that there is no one-size-fits-all solution to the question of whether or not to prepay home loans. The best decision for home-owners will depend on their individual circumstances.

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He added that home-owners should not use their emergency fund to prepay home loans. Emergency funds are important for unexpected expenses, such as a job loss or medical emergency. If home-owners use their emergency fund to prepay their loan, home-owners may not have enough money to cover these unexpected expenses.
If home-owners have received a bonus, home-owners may consider investing it in the capital markets instead of prepaying the loan. However, investing in the capital markets is risky and home-owners may not get a higher return than the interest rate on their home loan.

Also, if home-owners are close to retirement, they may want to consider prepaying their loan. This can help them eliminate liability and enjoy a more peaceful retirement.

First Published: May 26 2023 | 6:44 PM IST

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