Home Loan: Home loan prepayment decisions can backfire if you accidentally ignore these 6 things..

To reduce the burden of a home loan, most people seek to repay the loan as quickly as possible. Banks also offer prepayment options so you can repay the loan before the due date. However, this attempt to achieve quick relief can often backfire. However, ignoring certain factors in the matter of prepayment can lead to losses rather than gains. Learn about six important things to consider before making a prepayment.

Consider Funding Needs
Before deciding to prepay your housing loan, you should ensure that you have sufficient funds to meet other household needs, such as marriage, foreign travel, emergencies, etc. If you prepay from your savings, you will have to borrow money elsewhere to meet these needs. This could further complicate your situation.

Investment Income
The cost of prepayment should also be compared to the return on investment. If you have the opportunity to earn higher returns than your home loan interest, it's better to invest your surplus funds instead of using them to prepay. Since home loans are long-term loans, you can invest in equities for a longer period to earn better returns. The longer you invest in equities, the lower your risk.

Stage of the Loan
The stage of the loan at which you prepay matters. Interest contributes the most to the EMI during the initial stages of a home loan. Prepaying early in the loan can save you lakhs of rupees in interest, potentially reducing your EMI. However, prepaying loans in the mid-to-late stages may not fully benefit from interest savings. In such a situation, investing surplus funds is wise.

Pay off higher-interest loans first.
Home loan interest rates are typically lower than those on other loans, such as personal loans or credit card loans. Therefore, if you want to reduce your debt, it's better to pay off higher-interest loans first.

Tax Benefits for Home Loans
You are eligible to claim a tax deduction of up to ₹1.50 lakh per financial year on the repayment of the principal amount of your housing loan. You can also claim a tax deduction on the interest paid on your housing loan. Furthermore, due to the government's focus on "Housing for All," tax incentives on housing loans may increase in the future. If you prepay your housing loan, you will lose these tax benefits; making a partial prepayment will reduce the tax benefit.

Prepayment Charges
Consider the decision to prepay your home loan only after understanding the cost of prepayment. Banks generally don't charge any prepayment fees on adjustable-rate home loans, but fixed rate home loans may be subject to a prepayment fee. Before making a loan prepayment, consult your lender regarding all terms and conditions before deciding on a loan prepayment. (Note: This information is taken from HDFC Bank's website.)

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