Does Prepaying Your Home Loan Make Sense?
 |
 |
You can expect home loan rates to move up by at least one per cent in the coming months. It is always advisable to pre-pay your Home Loan, if you have extra cash available with you. According to source, the home loan rate is evaluated using reducing balance method and the interest rate is always evaluated on the remaining outstanding principal. If your home loan outstanding principal is high, the home loan interest rate will also be higher for your home loan. The earlier you prepay, the more you are likely to save.
Before you prepay Home Loan
 |
 |
If you have other personal loans or credit card debt, strongly consider paying off these debts before you pre-pay your loan. Before you prepay home loan or secured loans, priority should be to repay unsecured loans like credit cards and personal loans where interest rates are high. Remember that once you prepay a housing loan, that money cannot be borrowed back easily later on. Therefore, before you take the decision to pre-pay your home loan, consider whether you have an available buffer for emergency situations.
Prepayment penalties
For a financial institution, a prepayment results in the loss of interest income and therefore prepayment charges are sometimes applicable. Prepayment penalties can be negotiated if you have a good credit history. Understand what fees you might have to pay, and negotiate where possible to bring these down. If you are considering to pre-paying your loan because you want to refinance your home loan at a cheaper rate with another lender, understand what fees or expense you might have to pay. When the prepayment penalties and charges are high, it is recommended to refrain from pre-paying your home loan.
 Having any query regarding Home Loan? Let our Expert help you. Click here. |
Usually, on prepayment, the EMI is kept constant but the term of the loan is reduced to reflect the reduced principal. This eliminates the tedious procedure of replacing old Post-Dated Cheques (PDCs) for the original EMI amount with new PDCs for repayment of the reduced amount. However, in some cases financial institutions allow you to keep the term constant and reduce the EMI, especially if you are having trouble servicing a higher EMI.
Prove the source of funds
Most lenders levy prepayment penalty only if a home loan borrower is pre-closing the loan with borrowed money. If home loan borrowers wish to pre-close their loan without having to pay any penalty, they need to prove that funds are out of their own resources. According to financial planners, the easiest way to prove that the fund belongs to you is a bank account statement. In circumstances when someone borrows from their near and dear ones, they (borrowers) should ideally do so through cheques. It will make the job of proving the source of funds easier. If you fail to prove the origin of the fund, you should insist the lender for a one-on-one discussion. Every lender has the power to waive certain penalties including prepayment penalty. It depends upon your negotiating ability. Prepayment penalties can be negotiated if you have a good credit history or good negotiating ability.
Refrain from pre-paying your loan
Some institutions however, charge additional penalties in case the loan is being closed, especially if it is being taken over by another institution. Some lenders also limit the number or amount of prepayments in a year. If the prepayment penalties and charges are high or you have other personal loans or credit card debt, it is recommended to refrain from pre-paying your loan.
If your home loan interest rate has been increased and your lender is charging higher prepayment penalties, you can opt for partial prepayment of home loan. Most banks do not charge prepayment penalties for partial prepayments. By keeping the EMI constant and reducing the tenure on prepayment, you will save a larger amount than by keeping the tenure constant and reducing the EMI. The formalities for prepaying a loan are simple. You have to merely submit a letter along with a cheque for the prepayment amount and penalties if any. The earlier you prepay, the more you are likely to save on home loan interest rate and on your home loan.
Things to Remember
- It is always advisable to pre-pay your home loan if you have extra cash available with you.
- Higher the home loan outstanding principal, higher is the home loan EMI.
- Before you prepay Home Loan or secured loans, priority should be to repay unsecured loans like credit cards and personal loans where interest rates are high.
- For a financial institution, a prepayment results in the loss of interest income and therefore prepayment charges are applicable.
- Understand what fees you might have to pay and negotiate where possible to bring these down
- Most lenders levy prepayment penalty only if a home loan borrower is pre-closing the loan with borrowed money.
- According to financial planners, the easiest way to prove that the fund belongs to you is a bank account statement.
- Borrowing from near and dear ones, do so through cheques. It will make the job of proving the source of funds easier.
- Prepayment penalty charge depends upon your negotiating ability.
- If the prepayment penalties and charges are high or you have other personal loans or credit card debt, it is recommended to refrain from pre-paying your loan.
- Most banks do not charge prepayment penalties for partial prepayments.
- The formalities for prepaying a loan are simple. You have to merely submit a letter along with a cheque for the prepayment amount and penalties if any.
