During the previous few months, RBI has taken various steps due to which commercial banks have increased their interest rate on loans. By looking at the current scenarios of increasing inflation rates globally, almost all the countries are taking measures to curb the situation. But, it is impacting the borrowers, we can say “you”, at the end.
But, when it comes to the repayment of home loan, there could be two scenarios:
- You can continue to repay your loan as before, since banks do not increase your EMI, they will increase the tenure of your loan. You can continue to do that.
- You can prepay your home loan if you have enough corpus to protect yourself from making more interest payments during the rate hike.
We will discuss everything about prepayment of your home loan.
READ MORE: These 5 steps can save you from succumbing to higher home loan rates
Prepayment charges
It is unacceptable for the banks as they are getting interest on the lended money for a specific period of time. When you prepay a loan, the bank's interest income decreases for a while. For balancing out their income and losses, banks charge you a fee around 2-4 percent of the unpaid principal amount.
Comparison is the key: In term of your expense
You must compare your part of expense. You need to calculate the difference between what you have to pay over the period of your home loan tenure with the future value of money and charges you have to pay on prepayment of home loan.
READ MORE: Pre EMI vs full EMI: What should you consider while applying for a home loan?
Comparison is the key: In term of return on investments
Also, a comparison can also be done in a way that if you keep yourselves invested instead of prepaying your home loan, what would be the interest or return you can get. If such an investment return is more than what you have to pay as interest, then it is advisable to not to prepay your home loan.
On the contrary, if your returns or expected returns are less than the interest you have to pay, you can prepay your home loan. Less returns might be due to micro or macroeconomic fluctuations or due to your risk appetite or any other reason.
Current market conditions
Do your own research on what government and commercial banks are looking forward to and what are the market & microeconomic conditions. It would help you in making educated predictions on whether RBI will reduce interest rates, market conditions get better, and will your money be able to work for you.
READ MORE: 7 key factors to consider while taking a home loan
Consider debt stress
Prepaying your home loan does not only depend on the financial factors of your life, it can also be prioritised on the basis of your mental capability of handling finance. For example, even if it is financially viable to not to prepay your home loan, your debt is making you stressed enough that you are not able to concentrate on your daily work. If that is the case, then prepaying your home loan is viable.
However, if you are looking forward to analysing what would be the best for you to do with your home loan in terms of finance, then making a comparison is necessary before making any decision in panic.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
