Is the time ripe for part-paying your existing home loan?

If you have some spare cash, there is no time as NOW to make a pre-payment on your outstanding home loan, when the interest rates are high

 

There are myths and more myths. Also, pre-payment appears to be difficult proposition when inflation is high and there is a general squeeze on fixed salaries.

Yet, if you are paying 12% to 14% on your four to five year old housing loan, and have some spare cash tucked away, now is the time to cut your loan exposure. It’s a myth that you should repay only after a loan is five years or older. Sometimes, it’s wiser to even break fixed deposit investments to prepay loans ahead of schedule.

Just make sure that you have enough reserves set aside to see you through a rainy day or a sudden crisis. Else, you might get drawn into the repeat cycle of taking another loan, another interest rate structure, prepayment penalties etc.

We would advise against full-repayment, as banks and, especially non-banking financial institutes often impose a ‘pre-payment penalty’ or what are also called foreclosure charges of upto 2% of the outstanding loan amount, if you close your loan account completely.

Although, in a notification issued two years ago, The Reserve Bank of India (RBI) directed banks not to levy any pre-penalty on individual borrowers if they choose to pre-pay their floating interest home loans, some non-banking institutions continue doing so.

Be warned however that banks often waive off pre-payment charges if you negotiate hard and remember that whatever be the used up tenure of the loan, it is always cheaper to prepay and not just in the early stages of your loan tenure. Other tips to help you make this smart decision:

Tip# 1: Before you pre-pay, set aside some spare funds, invested in instruments that can be liquidated easily during a possible, future, medical or financial crisis.

Tip #2: If you have a credit card or personal loan, pay that off first because the interest rate on that will be the highest; at least higher than that on your home loan.

Tip # 3: Don’t forget that home loans also offer you certain tax benefits that drive down their post tax cost. Work out the economics of this tax benefit against pre-payment, with your financial consultant before you choose to go down this road.

Tip #4: Make sure that if there is a pre-payment penalty, it is not higher than 2%. Banks are obliged to send you a copy of the loan document.

Tip # 5: Remember that you can get the prepayment penalty waived off easily, if you maintain a good credit history. You can check your credit history and score from third-party credit rating agencies such as CIBIL (www. https://www.cibil.com/) for a very nominal fee of Rs 500.

Tip # 6: Quite a few banks do not charge pre-payment penalty if the loan is prepaid partially, which is what Creditfina consultants would advise you to do.

In sum, prepay only after you have set aside some money for meeting unforeseen emergencies and if you don’t have any unsecured loans to pay off first.

 

— From Creditfina’s Social Marketing Division

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