Prepayment of home loans, especially big ones like 50 lakh Home Loan EMI, is something that comes to the mind of every borrower at least once. But not everyone knows the best ways to make prepayment and what to do and what not to do.
So here are some tips and suggestions on part-prepayments for deriving optimum value out of them.
When deciding between EMI and tenure reduction, take your cashflow into consideration:
For 30 Lakh Home Loan EMI borrowers who want to pay off a portion of their mortgage early, there are two choices to consider. Either they can lower their EMIs or shorten the length of time they have to pay back their house loan. Despite the fact that the second choice would result in higher savings in interest payments, the decision to choose between the two should be based mostly on your available cash flow and financial situation.
If you took out a housing loan for 30 Lakh Home Loan EMI at a rate of 10 percent per annum over the course of five years, the current balance is Rs 28.25 lakh, and the loan is still outstanding, you would qualify for a home equity loan. By making a lump sum prepayment of Rs 3 lakh at the end of the 5th year and electing to have your loan’s term lengthened, you will save Rs 13.88 lakh in interest payments and have your loan’s term lengthened by 5 years and 1 month. You will save Rs 6.96 lakh in interest savings if you choose to continue with the same loan term. Your EMI will decrease from Rs 27,261 to Rs 24,365 if you choose to continue with the same loan term. If you are concerned that the rising interest rate environment may have an impact on your disposable income, consider reducing your EMI payments.
When compared to the savings produced by HLBT, the practice of prepaying your 50 lakh Home Loan EMI loans can unquestionably lower the amount of interest you pay overall; however, doing so by selling off your existing investments can have a negative influence on your overall financial health. A home loan balance transfer (HLBT), on the other hand, allows you to refinance your existing house loan and have it taken over by another lender at a cheaper interest rate.
As a result, your interest payout will be reduced, but your liquidity and existing assets will remain unaffected. For example, if you refinance your home loan to another lender at, say, 9 percent p.a. for the remaining 20-year term, you will still be able to save approximately Rs 4.68 lakh in interest costs without jeopardising your liquidity or current investments. As a result, weigh the savings resulting from part prepayments against the savings resulting from a home loan balance transfer (HLBT) and make your selection based on your liquidity and financial objectives.
Never disturb your contingency fund:
An emergency fund is meant to deal with financial exigencies or to fulfil obligatory obligations during unemployment or income loss due to disability. At the very least, the size of this fund should be sufficient to cover your mandatory expenses for at least six months, including an amount equal to 6 months worth of your 50 lakh Home Loan EMI. If you use your emergency fund to make home loan prepayments, any unanticipated incident that occurs in the future may cause you to take out loans at high interest rates or sell your other existing investments at below-market values to make up for a lost time. As a result, never deduct funds from your emergency fund when accumulating resources for completing home loan prepayments.
Don’t encash your investments that were set aside for financial goals:
Your financial objectives are the monetary manifestation of your life objectives. The creation of corpus for your child’s higher education or the arrangement of a down payment for your vehicle loan, loan against property, or other type of loans like housing loan for 30 Lakh Home Loan EMI or 50 lakh Home Loan EMI, are some of its most prevalent examples. If you redeem your existing investments that were intended for those purposes, you may be forced to take out expensive loans in the future. Furthermore, many loans require you to invest a particular amount of money as margin money or down payment in order to be approved. It is possible that redeeming the investments set up for such down payments or paying margin money will prevent you from being able to timely achieve those set goals.
Take into consideration the returns earned by your low yield investments.
However, even though loans for 50 lakh Home Loan EMI have one of the lowest interest rates of all retail lending products, their rates are typically greater than the rates on most fixed-income investments and savings accounts. As a result, surpluses held in fixed income products such as fixed deposits, bonds, and other similar instruments that are not intended for any specific financial goal might be redeemed for the purpose of making prepayments. When it comes to equity investments, on the other hand, their returns typically outperform house loan interest rates by a significant margin over the long run.
Consider the above-mentioned example of 30 Lakh Home Loan EMI, in which a prepayment of Rs 3 lakh resulted in interest savings of Rs 13.88 lakh in the case of a shortened loan term and Rs 6.96 lakh in the case of a shortened EMI schedule. For example, if you put that Rs 3 lakh into an equity mutual fund that generates a 15 percent annualised return for 15 years, your money would grow to Rs 24.41 lakhs at the end of the term yielding a profit of Rs 21.41 lakh.
So, overall, prepayment can be a great move to utilize your extra funds and reduce overall interest costs. Just ensure to keep in mind the above-mentioned points to maximise this facility’s benefits.
