Home Loan Prepayment: When is it beneficial and when is it harmful? Find out from your bank what the best timing is..

Most people in India take home loans for a long period, ranging from 15 to 30 years. Paying high monthly EMIs for such a long period can often be a challenge. In such a situation, people consider repaying the loan early. But is home loan prepayment always a wise decision? According to HDFC Bank, it's important to consider these six factors before making a decision.

First, consider: Are you prepared for other expenses?
Home loan prepayment is only appropriate if you have funds set aside for other needs, such as medical emergencies, children's education, foreign travel, marriage, business needs, etc. If you invest all the money in prepayment and need it later, you may have to take out a new loan, which will be more expensive.

Is the return on your investment greater than the loan interest?
If you are earning a higher return on an investment than the home loan interest, it's better to invest the money there rather than making a prepayment. If you wish, you can invest in equities for the long term. Over the long term, equities offer higher passive returns than loans, reducing the benefits of prepayment.

What is the right timing for prepayment?

Timing plays a major role in loan prepayment. In fact, in the initial years, a large portion of the EMI goes towards interest. Therefore, prepaying early can save thousands, if not lakhs. However, if the loan is several years old and the interest component has significantly reduced, the benefits of prepayment are limited.

Tackle expensive loans first.
If you have high-interest liabilities like credit cards, personal loans, or gold loans, settle them first. Because home loans have the lowest interest rates, it's wise to settle them last.

Tax Benefits to Consider
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 avail tax deductions on the interest paid on your housing loan. If you prepay the entire loan, this tax exemption will be lost. Partial prepayments may reduce this benefit.

Check prepayment charges
Banks do not charge prepayment fees on adjustable interest rate loans. However, fixed-rate loans may be subject to fees. Therefore, be sure to review your lender's terms and conditions before making a prepayment. (Note: This information is taken from HDFC Bank's website.)

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