Is it a good idea to pay off your home loan early?
When a person applies for a home loan, he usually considers his existing income and applies for the loan amount depending on his current eligibility. However, as the borrower’s income rises, he or she usually builds an excess.
Such debtors are faced with the problem of deciding what to do with their excess funds.
Should I pay off my mortgage early or invest the money elsewhere?
The answer to this issue will be determined by a variety of circumstances, as well as the costs and benefits of prepaying your mortgage. Let’s look at all of the elements that influence your decision to pay off your mortgage early.
Prepayment charges on home loans: When you prepay a home loan, the lender will usually charge you a prepayment fee. The amount of these fees is determined by the loan agreement you signed with the lender. Charges of this nature often range from 2% to 4%. Some lenders do not charge you a penalty if you pay off your loan early.
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According to a circular published by the National Housing Bank, which regulates all housing finance firms, housing finance companies are not allowed to charge prepayment penalties if the house loans are taken out at a floating interest rate.
If the borrower has returned the loan from his or her own means, the housing finance firm cannot apply a prepayment penalty on a fixed rate house loan.
“Own Resources” refers to any source other than transferring the home loan to another lender for this purpose. In addition, the RBI has directed all banks not to impose any prepayment penalties on any loans taken out at floating rates. So, even if you took out a fixed-rate home loan and paid it off with your own money, the banks can still charge you a prepayment penalty.
Depending on the money available, the loan can be paid in full or in part. If the amount prepaid does not exceed a specified percentage of the loan outstanding at the start of the year, usually 25%, lending institutions do not apply a prepayment penalty. So, if you prepay a portion of your bill within the 25 percent limit over the course of a year, you won’t have to incur a penalty.
Tax implications: Whether or not to prepay your house loan is influenced by the impact on your ability to claim an interest deduction under Section 24(b). If the home is self-occupied, you are only allowed to deduct interest up to Rs. 2lakhs.
As a result, if any partial prepayment does not reduce the amount of interest to less than 2.00 lakhs, it will have no effect on your tax liability. However, if the property is rented out, the decision will be different because, while the entire interest payment is currently tax-deductible, the total loss under the heading “income from house property,” which can be set off against other income, will be limited to Rs. 2lakhs for all the properties combined starting next year. As a result, consider the tax implications of lower interest outgo.
Future cash flow requirements: You should only decide to prepay your house loan after considering your future cash flow requirements for whatever purpose, including contingencies. Because home loans have lower interest rates than other loans such as personal loans and gold loans, your decision on whether to prepay and how much to prepay should be based on both of these factors. If you need money in the future after paying off your house, you may have to borrow money at a much higher interest rate, whether through a gold loan or a personal loan.
Returns predicted from alternative investment channels available: When weighing the pros and cons of prepaying the loan, keep in mind the other choices for using your surplus funds. If the predicted returns on such assets are similar, it is not a good idea to pay off the loan early.
Bonds or bond funds schemes of mutual fund institutions are one of the alternate investment possibilities available. Another option is to invest in equity-oriented mutual fund schemes if the funds can be invested for more than ten years, as the returns on equity-oriented funds have historically been good over such a lengthy period of time.
As a result, there are numerous aspects to consider when deciding whether or not to prepay your home loan. However, in this circumstance, there is one psychological aspect that is equally crucial. People of the old school of thought do not want to owe money on their homes, and this psychological factor plays a role in a large number of cases.
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5 Home Loan Tips to Consider Before Applying
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