Part prepayment is a facility that enables you to lower your home loan tenor (or EMI). Reducing the tenor allows you to repay the home loan faster as these are long-term.
Using a home loan repayment calculator can help you determine the numbers when opting for this facility.
The majority of borrowers take advantage of this facility if they have a lump sum amount available. However, they often get confused about whether to use the funds to repay the loan or invest in a high-yielding scheme like SIP.
What to Consider Before Taking a Decision?
Income Tax Benefits
Income tax benefits are the first factor that you should consider. You can claim the following income tax deductions:
- Up to Rs. 1.5 Lakh per year on your interest part under Section 80C
- Up to Rs. 2 Lakh per year on your principal part under Section 24
You can claim tax benefits on the interest and principal irrespective of whether you are about to part prepay or foreclose the home loan. Preferably you should avail the tax benefits of one financial year and prepay in the next to avail tax rebates from both years. Prepayment of home loans can be just as beneficial an investment like that in SIPs as you are reducing your liabilities. You can avail a total deduction on only the interest part in case of SIPs but both on the interest as well as the principal part in case of a home loan.
The sanctioned loan amount is another factor to consider – a higher loan amount makes EMIs less affordable. In such cases, part prepaying enables you to pay off your home loan faster, lowers your debt, and allows you to take the full advantage of tax exemptions.
Part prepayment improves your CIBIL score. Hence, use a home loan repayment calculator and prepay to improve your credit score if you are looking to avail credit in the future.
Funds for Emergency
It is essential that you keep funds for emergencies. Emergency medical situations necessitate immediate funds. Not having adequate funds in hand can lead to a critical situation. You may also end up opting for another loan.
Hence, do consider whether you have cash-in-hand to address such emergencies before you prepay or make an investment.
Charges of part prepayment is another point you should consider to decide whether to deploy your funds on it or invest in SIPs altogether. Some lenders will charge you a specific rate when you choose to pre-pay. In such cases, you have to calculate how much you stand to gain from prepayment.
On the other hand, companies like Bajaj Finserv don’t require you to pay any extra charges when prepaying. Taking advantage of this facility is exceptionally beneficial in such a scenario.
Loan in the Future
You should prepay your home loan if you plan to take another loan, in the future. Paying EMIs on two loans puts more pressure on your pockets. Also, lenders may reject your application or reduce the applied amount when they learn you already have an existing loan.
Hence, it is best to use a home loan repayment calculator to check how low the EMIs or how short the tenors become.
You have to take into account the above points to consider whether you want to prepay your housing loan or invest in a SIP.
One of the ideal options is to invest in SIP simultaneously when you take a home loan. That way, you have adequate funds to prepay when the former matures. Make sure to know and abide by the home loan prepayment rules to pay the least possible sum of funds possible.
More Read: PPd or FD: Where should you invest?