scorecardresearchPrepaying your home loan has several benefits. Details here

Prepaying your home loan has several benefits. Details here

Updated: 31 Aug 2022, 02:19 PM IST
TL;DR.
Finishing a home loan early may seem tedious at first but has a lasting impact as it saves much on the interest outgo while reducing the overall loan tenure too.
Prepay your home loan to get rid of debt early.

Prepay your home loan to get rid of debt early.

How many times have we been told to avoid debt? However, is it possible to completely negate debt like a loan sought to buy a home? The furore around debt is so loud that many have even gone on record to advise people against taking home loans, especially, with banks increasing loan interest rates. High-interest rates translate to paying more through equated monthly instalments (EMIs), which brings us to consider ways of bringing down the overall effect of interest.

Let us understand with the help of an example how taking a home loan can take a serious hit on our finances. Assuming that you are going to take a 50,00,000 home loan at the current 8.1 per cent interest rate for 20 years. The total amount payable would be 1,01,12,093 with the interest outgo being 51,12,093. At the outset, it may seem wise to buy a home without taking a loan, but it may not be possible for many, especially, those with familial responsibilities to bear. 

Now that you have decided to take a loan, you must decide to repay it in time to avoid damaging your credit score. Also, financial prudence underscores how the total amount paid through EMIs during loan repayment must not exceed 40 per cent of your disposable income. Of course, it may look difficult initially but then look at how the final outgo will be more than what you had envisaged, it makes sense to plan how to get rid of your loan early.

You can do nothing to lessen the interest rate. However, what you can do is lessen its impact. This is possible only when you start prepaying the loan amount. Over a period, you will realize how the burden of interest will lessen. This is because you will be repaying more than is stipulated at the given interest rate resulting in finishing off the liability much before the completion of the loan tenure. The total interest outgo would also be far less than the original interest amount to be paid.

Taking forward the aforementioned example wherein you had sought a 50 lac loan at 8.1 per cent interest for 20 years, we will explain how the burden of total interest and EMIs is reduced with prepayment.

Year 1

Opening balance of the loan amount: 50,00,000

Current EMI tenure: 20 years

Total interest due: 51,12,093

Total outgo through EMIs: 5,05,605

(Source: https://www.hdfc.com/home-loan-emi-calculator)

Since banks allow you to start prepaying the loan amount once you have completed the first year of your loan tenure, you can start prepaying the loan gradually from the second year.

Year 2

Opening balance of the loan amount: 48,95,575

Loan prepayment details

From Year 2, you start paying 10,000 more every month. This brings you to prepaying 1,20,000 every year.

With an additional payment towards the loan, i.e., a prepayment of 10,000 towards the loan, you can easily get rid of the debt in 2036.

Total interest outgo during the loan tenure: 30,65,304

This saves you a net interest outgo of 20,46,789 which otherwise you would have paid on not opting for loan prepayment.

(Source: https://emicalculator.net/home-loan-emi-calculator/)

The interest burden is considerably reduced, thus, leaving you free to plan your finances. 

Taking a home loan allows you to avail yourself of tax benefits too as you avail yourself of a deduction of up to 2 lakh under Section 24 on the interest that you pay, thus, reducing your net tax liability. Under Section 80C of the Income Tax Act 1961, you can seek a tax deduction of 1.5 lakhs on the principal amount paid towards loan repayment. 

Article
To get a home loan at a low rate of interest, borrower should have a good credit score.
First Published: 31 Aug 2022, 02:08 PM IST