Home loan is usually offered for a longer period and for a larger amount. Hence, home loan brings a huge financial burden for the borrower and it leads to hamper the financial budget of the borrower many times, if he or she does not plan the same in an appropriate manner. Home loan prepayment can lead to financial benefits to the borrower as the same is helpful to reduce the interest rate burden. The reduction of interest rates lead to reduce the overall cost reduction for the borrowed housing loan.
In India, the average tenure of the home loan is around 10 years. Hence, it is obvious that home loan prepayment is very much preferred by the home loan borrowers to get rid of the huge home loan burden. Home loan foreclosure is always beneficial for the borrower, but it is a financial loss when it comes to home loan provide or lender. This is the main reason why banks discourage the prepayment. One of the most popular & common way to discourage prepayment is the refusal of bank to accept the foreclosure application, if the person does not visit the branch physically. Most surprisingly, majority of the home loan providers have not enabled the facility of the online prepayment of housing loan. However, one point that is to be highlighted is that if the person is physically not available, then his or her representative can visit the branch with letter of authorization to proceed with the home loan prepayment process on behalf of the borrower.
Most of the time, the borrowers are in the dilemma that they should prepay the home loan or they should invest the same in other options. Especially, such dilemmas are encountered when the borrower receives the bonus or increment in the salary. At such times, the borrower should carefully evaluate the prepayment penalties (If any), and then accordingly take a call. The borrower can check all the options with respect to rate of return in all the cases, such as investment or prepayment. Undoubtedly, the borrower will always find the prepayment option more suitable by all means. Home loan foreclosure or home loan prepayment brings around 8% to 9% average returns in majority of the cases.
Also, when the borrower focuses on prepayment of the home loan, it automatically reduces the total interest rate outflow. There are many home loan borrowers those get confused whether to reduce the EMI or to reduce the home loan tenure. The wisest and long term effective decision is always to reduce the tenure of the home loan. As and when the salary of the person increases, the borrower can increase the monthly instalment amount. This shall lead to prepay the home loan in a steady manner. If possible, the customer can even plan to pay extra EMIs. As per the usual policy, the one extra EMI can paid by the borrower in a year. If the borrower can combine both the option, that is increment in EMI amount and paying off one extra EMI, then proper planning of the home loan prepayment can be arranged.
There are certain things that needs to be kept in mind while the borrower opts for the home loan foreclosure. The borrower should submit the important documents such as ID proof. The borrower must always take the acknowledgement of the payment done. Acknowledgement should consist of the principal outstanding amount after prepayment and tenure of the balance home loan and even new monthly instalments. It is important that acknowledgement must be signed and stamped by the authorities of the bank or lender. If monthly instalments are getting debited through post-dated cheques, then the borrower has to issue fresh cheques consisting of the revised EMI amount. At the same time, the borrower needs to take the unused cheques back in order to avoid misuse. The borrower needs to mention his name, account number of the home loan, mobile number etc. behind the cheques.
There are few banks that insist to check the sources of funds that has been used for the home loan prepayment. Hence, the borrower should also carry and submit the past 6 months bank statements, with the usage of which, the borrower is prepaying the home loan. Last but not the least, the borrower has to ensure that all the prepayment details are updated in CIBIL. Usually, such details get update with 45-60 days. Hence, you can pull out your CIBIL report after 60 days and crosscheck the same.
Tax Benefits on a Home Loan
If the house for which home loan has been opted is a self-occupied, the interest paid towards the home loan in a financial year is allowed for the tax deduction under the Section 24, up to a maximum of ₹ 2 lakhs. For a home loan borrower falling under the highest tax bracket, this provision of tax benefit reduces taxes to ₹ 60,000 in a year.
For the first-time home buyers, there is an additional deduction of up to ₹ 50,000 under Section 80EE, towards the interest paid.
On the principal component of the home loan, there is one more tax deduction applicable under Section 80 C. Under this, a home loan holder can avail a tax deduction of up to ₹1.5 lakhs.
So when repaying your home loan don’t forget to consider these factors. First, calculate then only come to a decision.
(Updated 03-07-2019)
