To prepay your home loan or not? Partial or full prepayment makes sense, but only in some cases. Read on, to pre pay or not. When to prepay? As a golden rule, you are always advised to keep your 4-5 months salary as contingency corpus, along with some liquid instruments for easy access in an unforeseen circumstance. Then use the money to first retire high-cost debts such as credit cards and personal loans instead of using it for home loan pre-payment. Only then think of repaying the home loan. Prepay the house loan only if you have surplus minus your regular investments. Conditions when to pre pay the home loan: Interest rate increase You can opt for part-prepayment, if the interest rate on your home loan is increased. This will ensure that your outgo towards monthly installments or loan tenure does not increase. The other option is to refinance the loan at a low rate, but this will attract a switching charge. For instance, PNB Bank charges 1% of the outstanding loan amount, whichever is higher, for switching the lender or if prepayment is not from own sources. But on changing the lender to one offering a cheaper loan, you may end up paying more – penalty to the old lender and processing fee to the new one. Prepayment Remember that prepayment of housing loans can be expensive as it attracts a penalty. For example, HDFC Bank charges a foreclosure charge of two percent on the outstanding amount. Making partial-prepayments is one way to save charges. Most banks have zero percent charge on partial prepayment. HDFC bank allows prepayment up to 25 percent of the outstanding free of cost. But remember to enquire about the clauses attached to it as it may vary from one bank to another. 10-15 years remaining (for 20 year loan tenure) Most banks charge penalty, or do not allow loan prepayment in first 3 to 5 years of the loan. Pre-payment beyond this period is free, provided you show that it has been done from your own resources. It is advisable to wait if you are young, as you cannot claim tax benefit above Rs.1.5 lakh. However if your earning years are few, it is better to repay the loan as early as possible. 5-8 years remaining (for 15 year loan tenure) Towards the end of the loan tenure, you repay the principal amount that is a part of the Rs 1 lakh investment limit allowed under section 80C. Only if you are not investing in any of the exempted instruments you will be able to make full use of the principal repayment exemptions. So, you may be better off finishing it early. Last 3 years (for any tenure) No need to bother, as you are anyway servicing the principal amount.
Posted on: Thu, 04 Jul 2013 06:56:33 +0000
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