It is a natural human tendency to be averse of having debt. A loan of some sort is a debt that one will preferably prepaid at the earliest. A home loan should not, however, be viewed in the same light as a personal loan, car loan, etc. A home loan provides a range of advantages that may make it unnecessary to prepay.
Prepayment is a facility that enables you to repay your home loan before your loan term is finished. Usually, when they have money to spare, consumers opt for prepayment.
Things to remember
- EMI versus Tenure Reductions
Borrowers have two prepaid options to choose from, either reducing their EMIs or their term of the home loan. While a decrease in the tenure of the loan would result in greater interest payout savings, opting for the option of EMI reduction would lead to higher disposable income. The key advantage of prepayment is the reduction in the outflow of interest. During the initial stage of the home loan, the interest component is highest in the EMI. Therefore, prepayment of loans can not give you the full value of saving on interest in the mid-to-late stage. It is wise to spend surplus funds in such situations.
- Stay away from exiting investments and emergency funds
Financial objectives vary across individuals. It can either save money for the future of your children, such as higher education, or arrange down payments for car loans, property loans, etc. Many retail loans require a downpayment to take advantage of the loan. It takes a lot of work over a long period of time and steady investments to bring them to fruition. Therefore, the restructuring of your current home loan prepayment investments will now result in the use of loans at a higher interest rate in the future.
Emergency funds are important to deal with financial requirements or to meet unavoidable expenditures during periods of loss of income due to job loss, sickness or disability. Using your emergency fund to prepay home loans will cause you to use loans at much higher interest rates or liquidate other assets at suboptimal prices to deal with financial requirements
- Home Loan Balance Transfer (HLBT)
Present home loan borrowers may also qualify for home loan balance transfers in place of home loan prepayments. Transferring from your current home loan lender to a new lender the outstanding balance amount at a lower home loan interest rate will guarantee that your existing funds are not used for prepaid home loans while generating interest payout savings. It is therefore advised to compare and extract savings through the transfer of the balance of home loans and the savings given by home loan prepayments and to arrive at a decision. It will guarantee that in no way will your existing assets and your asset liquidity be affected.
Prepaying your home loan will minimise your overall home loan interest rates, but it can be detrimental for your financial wellbeing to do so by redeeming your current savings or emergency funds. Consider utilising surplus parked in fixed income items such as fixed deposits and bonds instead of home loan prepayment. With home loan balance transfer , another lender will take over the unpaid home loan sum at a lower interest rate. Without disrupting your current savings or impacting your liquid assets, this decreases your interest payout. Compare the savings obtained from part prepayments with those generated by HLBT before moving funds to make an informed decision.