Home loan prepayments: Some important points

The high home loan interest rates have forced the borrowers to think of prepayments. However, prepayment of home loans shouldn’t be just done impulsively. There are a lot of factors to consider before making a decision to prepay a home loan or not. Here are some basic things to consider.

Factors to consider before prepayment:

The current financial situation of the borrower: Is there enough money floating around to prepay the home loan?

How much money is needed immediately or in near future: Does the borrower have enough money to meet financial exigencies?

The home loan interest rates: Are they likely to rise, remain at the same level or fall?

Are there investment options available which can give better returns (of course with minimal risks) than the current home loan rates?

Important points:

Always calculate the total amount you have to pay to the bank. This included the home loan interest with the principal. This will give you a clear idea on the amount of money you owe to the bank.

If you are planning to invest the money instead of prepaying, calculate the total earnings by investments over the entire duration of loan amount. Always deduct the tax liabilities so as to reach exact figures. If subtracting your home loan repayment from the gains from investing, provide a surplus amount – it is always better to invest your money.

Prepayment penalties are also to be paid to the bank if you are not able to provide proofs that the money you are using to prepay is from windfall gains or your own. (People generally use Home loan balance transfers and get the money from other banks. In such cases banks will charge prepayment penalties).

If your home loan tenure has stretched substantially due to the increase in interest rates, consider making part- prepayments if your situation permits to keep the home loan tenure to the same levels.