Unlike the west, we Indians favour having a debt-free life. Though, given the overpriced properties prices, taking a loan is generally the sole alternative existing when one wants to purchase a house. This post will serve as a loan guide in Delhi NCR for those who want to know all about home loan prepayment.
With interest rates on loans being elevated in comparison to other developed nations, the interest amount paid by an average borrower in our country over the term of the loan is much high. This is where the prepayment alternative can be availed. It is feasible to prepay the loan, either completely or in part before the loan maturity, so as to lessen the interest load and cash outflow.
For instance you take a home loan of 40 lakhs at an interest rate of 10% per annum for a period of 20 years. The total amount you have to repay over the 20 years amounts to Rs 92.6 lakhs, with just interest of a whooping Rs 52.6 lakhs. The EMI amounts to Rs 38,601. If you want to reduce this load, opt for the prepayment option.
How to prepare for a prepayment?
The RBI has relinquished home loans prepayment penalty with floating rates. It is, hence, feasible to prepay the loan several times during the loan period. When one receives a lump sum amount, it is optional to utilize this to prepay the loan.
In this case, there is nothing exactly to be done other than visiting the bank and making the payment. However, it might be wise to plan for a prepayment. In this way you can save a preset amount each month in a liquid fund. To lessen the outstanding principal you can then make the prepayment in half yearly or quarterly intervals.
Precautions to be taken on prepayment
- Verify with the lender if any prepayment penalties are there prior to making the prepayment.
- There are certain banks which permit online prepayment of loans. On the other hand, if your bank does not permit this, then keep in mind to submit all mandatory documents with the bank when prepaying the loan. In addition don’t forget to take an acknowledgement of the prepayment.
- Now and then, you will have to explain the source of funds for the prepayment so as to avoid any penalties. Keep in mind to carry your 6 month bank statement for this.
- A loan prepayment improves your credit score. Remember to verify your credit report after 2 or 3 months of prepayment, to confirm if it has been updated with the prepayment details.
- If you have issued cheques or standing instructions for EMI and your EMI amount adjusts after the prepayment, remember to issue new cheque leaves or standing instructions to mirror the new EMI sum.
I will be discussing more about prepayment in the next post. We will discuss more about when should repayment be done and when not to. Also, what are the tax benefits on a home loan and which nuances you have to consider carefully.