6 reasons you should prepay your Home Loan

Home loans have made it easier for millions of Indians to fulfil their dream of owning property. While it is easy to repay the loan in affordable EMIs, here are a few reasons why you should consider prepaying a home loan well before the tenure ends.

1.   Savings on the interest cost
 

The interest cost is a significant portion of your home loan EMI, especially on long-term mortgages. The prepayment of a home loan could help you save lakhs compared to seeing it through the pre-determined loan tenure. The earlier you can pay off the loan, the more you can save.

Here is the difference explained with a short example:

Assume you opt for a home loan of Rs 1 crore at 8% interest per annum for 25 years. If you repay the loan as scheduled, your total outgoing on the mortgage will be Rs 2,31,50,000. However, if you can prepay the home loan by year 15, the total landing cost for the asset will be Rs 1,72,00,000. That is a gross saving of almost Rs 60 lakhs!

2.   Better use of resources
 

Don't just compute the savings, but more importantly, include the opportunity cost of those savings. The cash flow you free up after prepayment of a home loan can be better utilised to fuel your other life goals, such as building a college fund for your child’s education or a comfortable retirement for your spouse and yourself.

Drawing from the example above, you get a surplus of Rs 50,000 per month to invest further. If you deployed that amount in a diversified/bluechip mutual fund generating an average of 12% return via an SIP over the next 10 years (instead of continuing with the EMI), your investment of Rs 60 lakhs would grow to 1.16 crore! Therefore, in terms of opportunity cost, you are looking at a choice between an expense of 60 lakhs versus earnings of over a crore.

You can save on the interest and even get tax benefits on a home loan.

3.   Lower credit utilisation
 

In addition to the finances, a home loan also has a long-term impact on your credit score. Even a minor hiccup in servicing an EMI will put a dent in your credit report, and the risk looms large till the loan has been repaid. Simultaneously, a mortgage drives up your credit utilisation ratio - a key component of your credit report.

One of the advantages of prepayment of a home loan is that it brings your credit utilisation ratio down and reflects as a badge of honour on your credit report. A good practice is to keep all EMIs, including loans, credit card debt, etc., under 30-40% of your monthly in-hand income for a healthy credit score.

4.   Improve eligibility for other loans
 

Getting other loans, such as automobile, education, business, or medical loans, become difficult if your credit report reflects a large mortgage taking up a sizeable chunk of your credit utilisation. It’s not that you won’t be eligible for another loan, just that lenders may want to limit risk exposure and offer a much smaller amount than you need. 

For some of the need-based loans, you may require down the road, compromising on the amount may not be an option. If you have the means to pay off the loan early, it restores your loan eligibility for when you need it the most.

5.   Unlock home equity
 

Real estate has been one of the oldest asset classes for investment across generations. As property prices rise, so does the value of your home. However, these are notional gains until you sell the house. If you have no intention of selling the house yet want to take advantage of the value your home has generated, you can opt for a home equity loan or home equity line of credit (HELOC). 

Simply put, it’s a loan or line of credit against the current market value of your home. Different lenders have different guidelines for home equity loans, but most will offer loans up to 70-80% of the property's assessed value. The idea of having additional credit is to redeploy the money towards other investments that can generate higher returns.

The advantage of having a HELOC is that the interest rates charged are significantly lower than that on a credit card or personal loan, and the loan eligibility is much higher. Whether you wish to purchase more real estate, fund your business or startup, or invest in other conventional assets, you are free to use the funds as you please. However, this is possible only if you have control over the pledged asset, which is not possible unless you repay your home loan.

6.   Secure peace of mind
 

One of the fundamental benefits of prepayment of a home loan is the peace of mind of knowing that your home is truly yours. A home loan is decades of commitment on contract. Loss of earning potential, accident, injury, or even devastating global issues such as war or the recently experienced pandemic can result in a financial setback. If you fall behind on your EMIs, your house may be repossessed. 

Prepaying a home loan is a significant milestone. It gives you peace of mind that you can easily tackle any other financial challenge and protect your family’s future.

Wrapping Up

Prepaying a home loan requires financial focus. The idea is to figure out a fair surplus each month and put it aside for prepayment of the home loan. On a quarterly or half-yearly basis, make an additional payment to the lender and get a proper acknowledgment for it. Over time, other lumpsum gains, such as a bonus from work, inheritance, proceeds from another asset, etc., can be used to fast-track the repayment. 

Another important factor is to be mindful of changes in the interest rate environment. A favourable movement in interest rates allows you to change the lender with a balance transfer on your home loan. IDFC FIRST Bank offers a friendly FASTTRACK Balance Transfer Facility, where you can easily shift your existing home loan with IDFC FIRST Bank at attractive interest rates and with better service. It would also make you eligible for an extended repayment tenure if required or a top-up loan to fund home renovations.

Secure your home and peace of mind today with IDFC FIRST Bank home loans.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.