Your 2022 house loan prepayment guide
Many people explore different ways to reduce or eliminate their debt. One approach that is fairly popular among borrowers is repaying the loan in part or whole before the complete duration of the loan. Although it may assist you in getting out of debt, it can also result in large savings over what you would have paid in interest normally.
Many banks already provide the possibility to prepay house loans to make this achievable. Let’s look at what loan prepayment is and how it works.
What exactly is home loan prepayment?
As the name indicates, home loan prepayment is a service given by certain banks to let borrowers make loan instalments ahead of time in line with the loan agreements. Payment in advance can be done in either full or in part.
The Benefits of Home Loan Prepayment
- Prevent repayment defaults during tough moments.
Clearing off a chunk of your mortgage earlier might help you prevent repayment failures during a bad economic period. This benefit of prepaying your mortgage prevents you from having to deplete your funds to remain solvent. Specialists advise paying off your debt sooner rather than later to avoid complications in the future. It is based on the premise that the earlier the healthier. Paying down sections of your house loan as soon as feasible makes sense, as big financial demands will certainly occur as the year’s pass.
- In the short term
When you make a partial payment on a house loan and keep your EMI steady, the term lengthens. A wise idea is to reduce your EMI rather than decrease the time. You may also benefit from the extra benefits of house loan prepayments in the relatively short term, such as reducing interest charges, lowering the principle, keeping monetary sustainability, and keeping a good credit score.
- Reduces your EMIs
If you opt to prepay your mortgage, your monthly EMIs will be reduced. This benefit of prepaying your mortgage becomes effective when you pay off a significant percentage of your debt. If you make a greater part payment on your house loan, you can change your EMI payments to meet your financial situation. If your salary has increased, you can increase your EMIs to speed up the repayment procedure as long as you do not reduce your tenure term.
Suggestions before paying off a house loan early
The overwhelming of Indians have been conditioned to regard debt as potentially hazardous. Although reducing debt is a good thing, having a strong distaste for debt is not necessarily a good thing. You can easily handle your debt if you make good planning. Prepayment may not be required since you would have considered your capacity to repay when applying for a home loan.
If possessing an unpaid debt scares you, you may consider purchasing home loan insurance rather than prepaying it. This protects your dependents from being required to make payments if something unforeseen occurs to you.
Remember not to jeopardise liquidity in your hurry to pay off your mortgage. Ensure you have enough money to satisfy both your current demands and your long-term financial goals.
While it is widely acknowledged that house loan prepayment is helpful, there are a few aspects that every borrower must be mindful of.
Prepayment lock-in time: Most banks have a lock-in period that normally lasts between one and three years throughout which you are not authorised to prepay the loan. Floating-rate loans, however, do not have lock-ins, according to RBI guidelines.
Prepayment penalty: A charge may be levied if the loan is repaid before the lock-in term expires (for non-floating rate loans and business loans). Check that the penalty will not be more than the interest savings.
Loan interest rate: The decreasing balance approach is used by most banks to calculate the interest component of a loan. This means that as the term lengthens, the interest component becomes less important. A loan prepayment calculator can help you calculate how much interest you can save by following a prepayment schedule.
Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. PropertyPistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.
