The home loan is usually the biggest loan in a borrower’s portfolio. While it helps build an asset, home loan equated monthly instalments (EMIs) can also claim a huge chunk of your salary, affecting your overall budget and making you jittery in the face of uncertainty.
It always helps to pay off your home loan early. Here are five reasons why prepayment of home loans makes sense.
It will lower the total interest you pay: A portion of your home loan EMI is allocated to the interest cost. When you prepay a part of the loan, it goes towards the principal payment. The moment the principal comes down, so will the interest cost. Paying off your home loan early can save you lakhs of rupees over the loan duration.
You will free up your cash flow for other goals: As you are no longer making monthly home loan payments, you have more money in your pocket to spend on other things. You could, for example, use the extra money to pay for your child’s college education or focus more on goals such as retirement.
“With this in mind, it is recommended that you pay off the debt earlier than expected by using wise financial planning. A retirement will almost certainly result in the cessation of active income. Furthermore, if you do not have the appropriate corpus, you may find it difficult to live happily after retirement,” says V. Swaminathan, CEO, Andromeda and Apnapaisa, a loan distribution firm.
Your eligibility to get other loans will increase: If you have a large home loan, upgrading your car through a car loan, or even taking a personal or education loan may become difficult. “When you take out a home loan, your chances of securing a personal loan or a car loan are reduced to some extent. When you have fewer existing debt obligations, lenders are more likely to offer you a larger loan amount,” says Swaminathan.
It will reduce your credit usage: In these times of uncertainty when job losses have become common, prepaying home loans faster allows you to reduce your credit utilisation. Also, the overall budget may become more manageable if you think uncertainty to job or income may be looming in the future.
According to general guidelines, the total EMIs one pays for all their debt, including loans, credit cards and others, should not exceed 30-40 per cent of your monthly in-hand income. Anything above that may result in higher credit use on your behalf. The relationship between the monthly EMI and the monthly income should be less than 40 per cent of the monthly take-home income, say experts.
Owning your home fully is a great feeling: Last but not the least, the freedom of not having to make home loan payments is great. You will have peace of mind as the risk of not being able to repay your monthly EMI if you experience a financial setback will be nullified. “If you fall behind on your EMI payments, your home may be repossessed. There is no risk of losing your property to foreclosure when you pay off your loan and own your home outright,” says Swaminathan.