Things To Consider Before Prepaying Your Home Loan

With the Reserve Bank of India (RBI) having hiked the repo rate twice in its bi-monthly policy meetings in the month of June and August, financial markets are anticipating another increase in the key repo rate during the fiscal. The Monetary Policy Committee (MPC) had raised the repo rate by 25 basis points in both meetings. The repo rate is defined as the rate at which the RBI lends funds to other banks.

Banks having a lower credit rating than the RBI will be forced to increase their Marginal Cost of funds based Lending Rates (MCLR), subsequently rising interest rates on retail loans. Like all floating interest rate loan borrowers, the existing home loan borrowers will also be burdened by the increased EMIs. In such cases, home loan borrowers can always consider making part-prepayments to reduce the total interest cost on the loan without being penalised. However, there are some aspects you can consider before making part-prepayments on your housing loan.

1. Stay Away From Your Emergency Fund:

   The primary purpose of the emergency fund is to deal with unforeseen financial crises such as unemployment or medical emergencies. Utilising your emergency fund for prepaying home loans will not only defeat the purpose of the fund, but it can also force you to buy new loans at a higher rate during times of financial emergencies in the future. Hence, it is advised to ensure that you have a well-stocked emergency fund. Never consider exploiting your emergency fund when making home loan prepayments.

2. Never redeem your existing investments set aside for your financial goals:

   One of the most important aspects of life is your financial success. Financial goals differ from person to person. It can either be saving money for your children’s future such as higher education or arranging a down payment for auto loans, loans against property, etc. Since most retail loans require a down payment to avail of the loan. It requires a lot of effort and steady investments over a long period of time to bring them to reality. Hence, redeeming your existing investments on home loan prepayments now will result in availing of loans at a higher rate of interest in the future.

3. Choose wisely between loan tenure and EMI reduction:

   Home loan borrowers can choose between two options while considering home loan prepayments. They can either bring down their existing EMIs or reduce the tenure on the home loan. Reducing your loan tenure can give you greater savings in interest payout. However, your income also plays a part in choosing between the two. Many borrowers also consider bringing down their EMI in cases where their disposable income is being burdened by the increasing rate of interest regime.

4. Evaluate and compare your savings through home loan balance transfer (HLBT):

   Existing home loan borrowers can also opt for home loan balance transfers instead of home loan prepayments. Transferring the outstanding balance amount from your existing home loan lender to a new lender at a lower rate of interest will make sure that your existing investments are not utilized for prepaying home loans while generating savings on the interest payout. Hence, it is advised to compare savings derived through home loan balance transfer and the savings generated through home loan prepayments and arrive at a decision. This will ensure that your existing investments and the liquidity of your assets are not affected in any way.

5. Take the returns derived from your current investments into consideration:

   Most fixed income products usually have a lower rate of interest compared to home loan rates. These fixed income products may be equities, bonds, fixed deposits, etc. The returns generated from these products can also be used to prepay your home loan. In the long run, most investments’ returns exceed that of the interest rates on housing loans. This extra fund can also be used to make prepayments for your home loan.