Should I Pay Off My Home Loan before the End of Scheduled Tenure?

A majority of home buyers use Home Loan to become a proud owner of their dream home for the rest of their life. But this sweet dream costs a huge number of EMIs for several years to come. For a lot many, the loan repayment is never without financial stress and debt burden which they want to get rid off as soon as possible. This is why many of the smart buyers who often look for loan prepayment opportunities, do not ever want to stretch the loan till the tenure end.

Here in this article, let’s explore this perennial query about loan repayments. Let’s find out what is more beneficial — whether one should let the Home Loan tenure mature on its due course or prepay to get rid of the debt as soon as possible.

Before you decide to close your Home Loan, you must carefully assess your situation. There is no one-size-fits-all advice. The decision would vary for the situation to situation. Whether you have availed a reputed HDFC Home Loan or some other loan, you must know that no bank in India charges prepayment penalty on flexible rate Home Loans after an initial lock-in period. However, it would still involve processing and closure charges.

1. Pay Home Loan Early & Save Money
If your Home Loan Interest Rate is as high as 10–11 percent per annum, it is viable to look for an alternative such as Balance Transfer at a low rate or to prepay a Home loan as early as possible. Rather than investing the surplus money somewhere else one should try to pay off the Home Loan and save this wholesome 10 to 11 percent of interest rate annually.

Paying your Home Loan interest rate is as good as investing the amount. In this case, you can use savings to pay your Home Loan and try to lower the EMIs and gradually pay off the loan much faster.

Many would guard you for the move and guide you to keep Home Loan for a longer time as it saves income tax. But the fact of the matter is you are practically not saving as much on the taxes as paying in the form of high interest rates.

2. Large Emergency Fund
Another consideration to hold back the decision is whether to contribute to an emergency fund or plan the Home Loan prepayment?

Well, building an emergency fund is a very important decision for household security, but at the same time, prepayment of Home Loan will free you from the extra burden of paying EMIs sooner. You can save more amount as Emergency Fund once the loan is closed.

In most cases, even if you have a small emergency fund for your family, you should definitely plan to pay off your Home Loan first.

3. More Costly Loans
If you have such loans in your list, which are costlier than Home Loan, then your priority should be to pay off these loans first. If you have both Personal Loan and Home Loan, it is preferable to pay your Personal Loan first as the interest rate is higher.

Personal Loan can cost you much more money than a Home Loan. Thus pay regular EMIs towards Home Loan and put aside all extra money towards repayment of Personal Loan first.

4. Never Ignore Retirement Linked Savings
To pay off Home Loan early, one should not compromise on their retirement linked savings. These retirement funds are really important for you and your family. Keep your retirement funds intact and keep putting aside small extra amount towards Home Loan repayment can help you gradually pay off your Housing Loan early without adding any extra liability.

There are many retirement savings schemes, which can also help you gain Income Tax benefits. You can use the saved amount towards Home Loan repayment.

5. Pay Off The Loan To Save

Last but not least: the decision to prepay a Home Loan considerably depends on the type of investment avenues you have been using for your surplus amount.

For instance, investment in stocks and equity-linked mutual funds could entail as good as 15 % of the return. However, it requires a lot of patience and constant review to stay invested to reap such lucrative returns. You may require professional financial advice for the same. Besides, returns are highly volatile and are not guaranteed. As against this investment, the decision to prepay a Home Loan would entail you a direct saving of 9–10 % depending on the rate of your Home Loan.

A majority of traditional investors go for guaranteed investment options like Fixed Deposits, Post Office Schemes, Debt Link Funds, etc. Herein the earning rate is only up to 6–7 percent. Thus, rather than parking your savings to financial institutions, you must rather pay out your Home Loan and save 9–10 percent on the interest rate.

So, your investment planning is also one of the critical factors to