Owning a house is a dream for most of us. There was a time when we had to save up quite a lot of money to build a house or buy an apartment. But with changing times, the process has also changed. Availing bank finance is easier now. The real-estate sector has improved and become more organized and transparent. Today, many potential homeowners have to bear 10%-25% of the total cost of their dream house and the bank provides the rest in the form of a home loan. Additionally, government policies encourage home loans by offering tax benefits.

While most aspects of home loans are quite well understood, prepayment of loans is an often confusing aspect. So it’s worth it to look at what prepayment entails. Basically, it is a payment of an additional sum of money over your principal and current interest payment towards your loan. The aim is to shorten the loan tenure or to reduce your EMI by paying off this extra sum. There are certain features that you must know before choosing to pre-pay your home loan. It can be a good tool when interest rates are steep. Prepaying can also reduce your financial burden.

A SMART MOVE

If you have a lump sum of money in hand and you are wondering whether to invest it or to use it to pre-pay your home loan, then consider this – with a new investment, you will have no guarantees of profitability, but by pre-paying, you can bring down your tenure and the outstanding principal amount, and even receive a tax deduction under Section 80C. If you are not using the total exemption of Rs. 1.5 lakh, it can be beneficial for you.

Prepaying your home loan saves you interest. Once you start paying the principal, either the EMI will gradually come down or  the loan tenure as per the requirement of customer. Thus, if pre-payment is done in the first half of the total loan period, the chances of saving in interest will increase.

Prepayment will affect your tax savings. But keep one thing in mind – interest savings are likely to be much higher than the tax savings. If you can close the loan before its tenure ends, your interest savings will exceed many potential tax savings.

The loan and your EMIs are structured in such a way that banks receive interest in the first half of the loan period. If you clear off a big chunk in this period, and let the loan run its course, you will be in a much better position financially.

Disclaimer: Copyright Kotak Mahindra Bank Ltd.

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