Home loans become a major financial commitment for most borrowers due to the higher loan amounts and longer repayment tenures. The longer repayment tenures also result in higher interest component. Therefore, most home loan borrowers seek to prepay their outstanding loan amount partially or fully to reduce their overall interest cost and EMI burden.
Below-mentioned are the factors that existing home loan borrowers should consider while prepaying their home loan.
Select between reducing the EMI or the loan tenure
The existing home loan borrowers can either opt for minimizing their home loan EMIs or reducing their home loan tenure while making prepayments. EMI reduction option increases the overall proportion of disposable income whereas tenure reduction results in higher savings in interest cost. Thus, the borrower should select either of the two options depending on whether he/she wants to reduce his/her EMI burden or overall interest cost.
Home Loan Balance Transfer of existing home loan to save on the overall interest cost
Existing home loan borrowers have the option of transferring their home loans to other lenders at lower interest rates. This facility is especially beneficial for borrowers who are eligible for home loans at lower interest rates due to the improvements in their credit profile since the availing of allows the borrowers to reduce their overall interest cost without impacting their liquidity or existing investments. Applicants can also visit financial marketplaces like Paisabazaar to check the home loan balance transfer interest rates offered by various lenders. Existing home loan borrowers can use the balance transfer calculator to calculate the estimated savings before applying for balance transfer.
Do not use emergency funds for making home loan prepayments
Emergency funds allow individuals to meet unavoidable expenses, such as payment of existing EMIs, insurance premium, rent and children’s education during periods of income loss caused by unemployment, disability, sickness, etc. Using the emergency funds for making prepayments might force the home loan borrowers to liquidate their existing investments or avail loans at higher interest rates to combat financial emergencies.
Factor in the returns generated by fixed income instruments
Home loan interest rates are usually higher than the returns generated by most fixed income instruments. Thus, surplus funds deposited in fixed deposits, short term debt funds, etc. but not meant for any crucial financial goal or emergency funds can be withdrawn for making prepayments. However, the long term returns generated by equities or equity funds are usually higher than the interest rates charged on home loans. Thus, borrowers should avoid redeeming the long term investments in equities or equity funds for making prepayments.
Avoid withdrawing investments designated to meet important financial goals
Many home loan borrowers prepay their home loans by redeeming their existing investments kept aside to fulfill their crucial financial goals. However, doing so might force borrowers to avail costlier loans to meet those unavoidable goals.
