Home loan: How to go about pre-paying it

A home loan is a considerably high-quantum loan, with an extended repayment period. However, by prepaying your home loan, you can improve your credit score. Further, the sooner you repay your loan, better are the chances of stabilising your finances.

Prepaying your home loan can help in reducing the total cost of interest. This can also help you to divert your attention to other financial goals. Also, the recent 25 basis points reduction in key policy rates (As per the RBI bi-monthly monetary policy, February 2019) can be a significant factor in reducing your EMIs. Therefore, now is an excellent time to prepay your home loan.

Here are a few tips you can follow to prepay your home loan:

1) Choose wisely between EMI and tenure reduction

While partly prepaying your home loan, you can get two options viz. reduce the EMI and cut down the tenure. What can help you save more money would depend on your disposable income. However, you can benefit more by choosing EMI reduction during a rising interest rate regime.

For instance, you have a home loan worth Rs.50 Lakh, at 10 % per annum, for 20 years’ tenure. Therefore, your repayment amount is Rs.48, 251 per month. If you make a lump sum prepayment of Rs.12 lakh in the 5th year and 6th year, your tenure will be reduced by around 22 months.

2) Have a strong emergency corpus

Are you worried that financial uncertainties could hold you back from prepaying your loan? Unpredictabilities such as inflation, medical emergencies, job loss etc. can wipe out one’s income. Therefore, expenses during an emergency can destabilise your monthly loan repayment patterns.

However, a substantial reserve corpus or contingency fund can support your finances during emergencies. Thus, you can use your cover emergency expenses without affecting your repayment plans. This can also help you in generating a surplus amount through your investments. You can thus prepay your home loan quickly by building a strong emergency corpus.

3) Look for savings derived from part prepayment

Prepaying your home loan by diverting your surplus through other investments can help you save. The only downside is that it could impact your financial security.

Your loan prepayment plan could push you away from other financial goals. Hence, you may want to compare the savings derived from the home loan part-prepayment option towards other financial goals. You can choose to prepay your loan partly if you have favourable liquidity and your journey towards other financial goals is unaffected.

4) Avoid redeeming goal-based investments

Your financial goals are your life goals, monetarily defined. You may have invested separately towards your retirement, child’s education, world tour etc. Diverting money from these goals could result in higher borrowing later. Even the smallest loan requires a certain amount of down payment, which in turn could affect your goals. You may have to divert surplus income towards paying other personal loans. Therefore, it is wise to avoid redeeming goal-based investments to prepay your home loan. Making regular goal-based investments can help you fulfil financial goals while prepaying your existing home loan.

Conclusion

Prepaying your home loan can help you reduce your EMI and loan tenure. However, this should not affect other financial goals. Having an emergency corpus can guard you against financial uncertainties. By having a strong emergency corpus, choosing a sound prepayment option and avoiding withdrawals, one can prepay their existing home loans.