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Home Loan Prepayment for NRIs: Should You Pay Off Early or Invest?
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No prepayment charges. The customer can prepay the entire home loan any time after the first EMI.
The sooner you prepay, the less you pay in interest, especially for the first few years of the loan. This is because most EMIs have a heavy interest component in the initial years.
Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Home loan prepayment helps you save on the interest amount as you pay a significant amount off your loan ahead of time. However, is it a smart financial move for the NRIs? Or is it more beneficial to use any additional capital in an investment? Read on to explore the key factors to consider when making the decision.
What is Home Loan Prepayment?
NRI home loan prepayment refers to making payments beyond the regular EMIs towards the outstanding loan balance. This is either:
Benefits of Home Loan Prepayment
For NRIs, prepaying a home loan early seems like a logical option, especially if you’re earning in foreign currency and have a higher disposable income. Here are the benefits:
Reduced Interest
One of the greatest benefits of prepayment is the significant reduction in total interest paid over time. The sooner you prepay, the better. Particularly, in the first few years when the interest part of EMIs is the highest.
Lower Financial Risk
For NRIs exposed to currency fluctuation risks and potential changes in employment or immigration status, lowering liability on Indian loans provides a layer of financial security.
Peace of Mind
Debt-free living is more fulfilling. Prepaying can ease stress and make your finances less complicated, particularly if you have other financial obligations overseas.
Limitations of Prepayment
Here are the potential drawbacks of home loan prepayment:
Loss of Tax Benefits
NRIs with taxable income in India can miss out on Section 80C (up to ₹1.5 lakh on principal) and Section 24(b) (up to ₹2 lakh on interest) deductions if the loan is fully repaid.
Low Effective Return
If you have better post-tax returns available elsewhere compared to the home loan interest rate you are paying, tying up money in prepayment may not be capital-optimal.
Key Factors to Consider Before Making the Decision
NRIs should consider these key factors before opting for home loan prepayment:
Risk Appetite
If you are risk-averse, you may like the assured savings through prepayment. In case you are not averse to market movements, investment may yield higher returns.
Investment Tenure
Longer time frames render more attractive equity investments. For short-term needs (1 to 3 years), debt funds or prepayment could be safer.
Foreign Exchange Considerations
Being an NRI, your income and certain investments could be denominated in USD or AED. Prepaying an INR loan could keep you safe from future forex movements.
Loan Stage
In the initial years, the interest constitutes a significant portion of EMIs, and thus, prepayment makes a greater difference. In subsequent years, the benefit of prepayment reduces.
Wrapping Up!
Prepaying your home loan or investing your surplus funds should not be a generic decision. It involves a complete evaluation of your investment goals, existing liabilities, risk appetite, and investment understanding. For most NRIs, investment has more long-term rewards, particularly in a stable interest rate scenario. But mental comfort and assured savings by prepayment cannot be ignored.
Take a look at Kotak’s NRI investment opportunities to stay updated about the availability of options while you decide on home loan prepayment. You will find many investment options under our NRI banking section.
This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Mutual Fund investments are subject to market risks read all scheme related documents carefully before investing.
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