Dos and Don’ts for a Home Loan Prepayment

Prepaying loans is a good way to get rid of debt sooner rather than later. Especially if your monthly income has recently increased, you may be considering reducing your liability by prepaying a loan. While it sounds like a financially responsible thing to do, when it comes to prepaying a home loan, things can get a little tricky.  

If you are looking to prepay your loan, follow these home loan prepayment rules to make things easier.

Dos for home loan prepayment

1. Carefully choose the lender

When looking for a home loan provider, it’s important to make a choice based on its home loan prepayment rules and policies. Always go for a lender that offers reasonable prepayment terms and doesn’t extract exorbitant charges.

2. Prepay as early as possible

Most lenders use the reducing balance method to calculate the interest component. This means that the interest amount is higher in the initial stages of repayment and keeps reducing towards the end of the tenure. So much so, that the first few EMIs are made up almost entirely of the interest component. Since the whole idea behind home loan prepayment is to save the money that you would otherwise pay as interest, it makes sense to prepay your home loan as early as possible. The sooner you pay off the loan, the more you save.

To estimate your EMIs, use free online tools like home loan EMI calculators to plan ahead.

Additional Read: How to Repay Home Loan Faster

3. Do the math

While there are undeniable benefits of prepayment of home loan, it is not always the right way to go. Calculate the returns you could be making with the prepayment amount if you were to invest it elsewhere. Compare that with the interest you’ll be saving by prepaying the loan. See which one outweighs the other and then make your decision.

Don’ts for home loan prepayment

1. Prepay within the lock-in period

Most lenders have a lock-in period for non-floating home loan interest rates. This could be anywhere between 1 and 3 years. If you decide to make a prepayment during this period, you might have to pay a penalty.

2. Forget to consider the tax savings

Both the principal and interest components of home loans offer numerous tax benefits and rebates, which you would be giving up if you were to prepay the loan.

3. Forget to collect the acknowledgement

You must collect the acknowledgement slip for prepaying the home loan. An acknowledgement is nothing but a written proof of the fact that you’ve made a prepayment. It also mentions the principal outstanding and the remaining tenure. Also, remember to collect all your unused post-dated cheques from the lender to make sure they don’t fall into the wrong hands.

If you are considering home loan prepayment, there are many factors you will need to meticulously consider.

Additional Read: 5 Things to Keep in Mind Before Prepaying Your Home Loan

If you’re looking for a reputed lender with fair home loan prepayment rules, visit Tata Capital. With attractive interest rates and years of experience in the industry, Tata Capital is the right home loan provider for you. Visit our website to check your home loan eligibility today.