Things to Consider Before Availing Home Loan Prepayments

A home loan is an expedient credit form for an individual planning to purchase a residential property.  However, the long tenure and high-interest rate levied by certain lenders can cause issues for borrowers. The high-interest outgo can sometimes exceed the principal amount.

When facing such issues, borrowers can opt for home loan prepayment that significantly reduce the EMI burden. As housing loans come with floating rates, there are no penalties or additional fees when making prepayments.

Nevertheless, home loan borrowers need to consider specific factors to direct them towards an informed prepayment decision.

Things to Check Before Applying for Home Loan Prepayments

Here are some factors to keep in mind when prepaying a home loan to make substantial savings.

• Picking the ideal repayment tenor

An individual needs to select the repayment tenor of such loans carefully, as it can affect the EMI sizes. Keeping the tenor too short raises the installment amount significantly and vice versa. Borrowers can also opt for home loan prepayments to reduce their repayment tenor, without increasing EMIs. This is an excellent option to make considerable savings as the interest payout would be less. However, opting for EMI reduction uplifts the disposable income. 

Hence, an individual can choose between these options or go with ways to reduce home loan tenor and EMI simultaneously.

• Avoid using savings for prepayments

Home loan borrowers planning to clear the outstanding dues with prepayment option usually lean on their savings. This practice can be problematic when facing a financial crisis. The primary objective of saving fund is to cover emergency spending like a medical crisis, big-ticket expenses, etc.

Utilising these finances to make prepayments can force an individual to avail high-interest loans or redeem other investments. 

• Loan stage

Reduction of interest outgo falls under the primary benefits of home loan prepayment However, this factor depends on the repayment stage. The interest component of home loan EMI is higher in the initial stages. Prepaying a loan when only one or two years are left as a tenor won’t be helpful. 

In this scenario, investing one’s surplus towards foreclosure is unfeasible unless there is a need for additional loan approval. 

• Compare lenders for refinancing

Refinancing is a means of transferring outstanding funds from one lender to another, offering lower interest rates and better facilities. The lower interest rate levied by a new lender would also reduce the EMI outgo without affecting current investments and liquidity. This is smart way of making efficient savings for financial strength. 

For instance, an individual makes a prepayment of Rs.3 lakh on the outstanding home loan of Rs.20 lakh at an interest of 9% and tenor of 20 years. Here, he/she can bring down the tenor to nearly 13 years and 9 months. Moreover, the savings on interest would be around Rs.13.49 lakh.

However, borrowers must opt for refinancing only if the home loan tenor is longer. In this regard, they must compare various lending institution to find a suitable one. Many HFCs also provide a pre-approved offer on various financial products, such as home loan and loan against property, which make the application process convenient. Check your pre-approved offer by entering details like name and contact number.

These are a few factors that can help a housing credit borrower make efficient savings on disposable income through home loan prepayments. They can also bring down the EMIs and reduce the tenor by choosing a better financial institution.