Prepayment of your home loan – To prepay or not to prepay

In India, home loan is usually the biggest debt that a common man takes on during his/her lifetime. When you pay off your home loan either entirely or in part before the defined due date, it will be called as prepayment.

By choosing the option of periodic prepayment you can reduce your principal amount by which your interest amount on home loan will also reduces resulting into lower EMI.

By part prepayment of your home loan in addition to your regular EMI you can also reduce your future liability substantially.

home loan prepayment

Why prepayment of home loan is beneficial than Fixed Deposit

Generally interest rate of home loan use to be higher than the fixed deposit rate. If you keep your surplus money in a fixed deposit or invest in some other saving scheme then you will never get a higher return than the interest amount you pay for your home loan.

If you have surplus money then you should go ahead and make part prepayment for your home loan.

Cost for prepayment

Banks like SBI and Axis do not charge any fee for prepayment of home loan. In addition to these banks there are some other banks who do not charge fee for making prepayment.

However you need to look into this factor before availing your home loan. In a recent move, National housing board and RBI has directed banks not to charge any prepayment fee for their home loan. So we are expecting all banks to follow such directions soon.

Income Tax benefits

Prepayment of home loan in addition to your EMI will also cover under section 80C for your income tax deductions as this amount is a repayment of your principal amount. You can claim up to Rs. 1, 50,000 as income tax deduction under section 80C of Income tax act.

Making prepayment will also improve your credit score if you are making all your EMI payments in time.

In the initial years of home loan tenure, majority portion of you EMI will be interest and principal will be less i.e. you will be paying less toward reducing your principal amount and more toward interest payment. For this reason, experts always suggest to make prepayment in the early part of home loan rather doing it at the end of the tenure.

If you do not have enough surplus funds to prepay then you can consider increasing the EMI by reducing your home loan tenure. Before increasing your EMI you need to look into your regular income to take on such increase.

If you have more than one loan then we suggest you to consider prepayment for that loan which has highest interest rate and then come to the one having lower interest rate. In this way you will be more beneficial.

With no prepayment charges you can pay off regularly to reduce your loan liability. Even if your lender allows you to make prepayment once in a quarter or 2 to 3 times in a year then do so to reduce your liability.

We suggest you not to make prepayment for your home loan if you have just a few years left on your home loan, instead of prepayment, it would be better if you invest that amount somewhere in fixed deposit or public provident fund.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.