Even though it is good to prepay your Home Loan (it will, of course, reduce your EMIs and help your Credit Score). But this may always not be the right thing to do. We’ll give you scenarios where prepaying is beneficial.
You Have No Other Loans
You have a 20 year Home Loan for Rs. 50 lakh. 5 years have already gone by. You receive a Rs. 2 lakh bonus. Let’s say the interest rate is 10%. Assuming you have no other loans and are enjoying tax benefits on the loan, it makes sense to prepay your Home Loan. This is because you will save Rs. 6,31, 979 of interest.
Not only that, your Home Loan tenure will go down by 1 year and 5 months. Since the tenure will still be over 10 years, the interest portion will continue to dominate your EMIs and you can keep claiming your tax benefits.
You Just Started Repaying Your Home Loan
In the initial years of your Home Loan, the interest component makes up close to 90% of your EMI. So, when you prepay you save big on interest payments. However, as you near Loan maturity, your principal repayment will be much bigger than the interest component and prepaying may not be beneficial, especially if you are availing tax benefits.
Here’s an example. Assume you have Rs. 50 lakh Home Loan with 10.5% interest rate and 20 year tenure. Your interest payment will be Rs. 3 lakh a year while principal repayment will be close to Rs. 50,000. If you prepay Rs. 2 lakh of your principal when you are just 2 years into your Loan, you will save Rs. 8.8 lakh of interest. If you do it after repaying your Loan for 15 years, you will save only Rs. 1.2 lakh.
So, prepaying a Home Loan that is near maturity is less beneficial when compared to prepaying a Home Loan that is newly taken.
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