When Aniket, a 35-year old IT professional, started planning to buy a home, he knew would have to apply for a loan. However, after spending some time researching the home loan market, he was not so confident if he really wanted to borrow from the bank. The loan interests were high and he feared the consequences if he failed to repay the loan in time.
No one likes to be debt-ridden. A loan, be it of any kind, is a debt that sensible people would want to pay back at the earliest. The feeling of being debt free can be satisfying, and a prepayment or repayment can generate savings as well, as you donâ€™t have to pay the interest once the loan is repaid. Moreover, if the interest rate is on the higher side, as compared to prevailing market rates, it makes perfect sense to repay an existing loan early.
A home loan, however, should not be judged in the same manner as a car loan, personal loan, or educational loan. The reason being, a home loan offers several benefits over other loans due to its lower interest rates and longer repayment terms. Though a repayment can give you freedom from EMIs, you will seize to get the income tax benefits that come with it.
Alternatively, since home loan interest rates are much lower in comparison to any other type of loan, the repayment amount can be used for investments that offer higher dividends.
Think Twice Before Taking the Plunge
It would be prudent to ascertain your financial position prior to undertaking the home loan repayment project. It is necessary to carefully assess whether all your long and short-term financial needs are addressed, including backup for contingencies.
It is also essential to evaluate between a repayment and a partial payment, as in, which one would be more beneficial for you considering your present financial scenario. Most financial institutions and banks today allow a partial payment so that customers can pay a part of their loan whenever they have surplus cash in hand. Modification in the repayment schedule is also permitted by major banks, where loan customers can increase their EMIs, which, in turn, gradually reduces the principal amount over time.
Once the payment gets transferred from your bank account to the loan account, there is nothing that can be done, as loan repayments cannot be reversed in any way. Although you can take a mortgage loan on the free asset, it won’t make much sense as you will ultimately end up paying much more. Please remember, interest rates for a mortgage loan is always higher than a home loan, as banks presume that a customer is offering the home as a mortgage to come out of an acute financial crisis.
Consider the Following Factors Before Making Home Loan Repayment
You must consider the following factors before you allocate funds for home loan repayment.
Funding for emergencies and financial goals.
Whether or not you are in a suitable position to repay the home loan depends on your financial portfolio and family structure. Before considering home loan repayment, make sure you have adequate funds to take care of marriage and educational expenses of your children, as well as other short and long-term financial goals.
Getting fund-strapped and overstretched due to home loan repayment is a situation you should ensure to avoid at any cost. Moreover, you should also keep a lump sum amount aside for unforeseeable events such as medical emergencies or job loss. Be sure that you don’t have to take a personal loan or a mortgage loan at higher rates in order to meet these expenses.
Look at lucrative prospects your home loan repayment amount can generate.
Take into account the returns that can be earned from the home loan repayment amount, that is if the amount that you are planning to repay is invested in other financial assets. If an opportunity exists, which can trigger higher returns than the home loan interest you are paying, then it is better to invest the repayment amount in such investments rather than using the funds to repay the home loan.
The beauty of a home loan is its long tenure. This special feature separates it from any other form of a loan. To make use of this unique feature, inflation-defeating, long-term investments like equity and mutual funds should be looked at. The risk of investment options like equities reduces in proportion to the span of holding, which means, the longer you hold, the lower will be your risk.
The Sensex, over the last 15 years, has given an average annualized return of fifteen percent. Assuming that home loan interest rates areÂ 8.35 toÂ 8.65 percent at present, investments in equities can give you a solid capital gain over the long term.
Another great investment opportunity is Systematic Investment Plan (SIP). Instead of using your surplus funds to pay the bank, systematically invest it in mutual funds. Some well-performing funds have the track record of providing dividends of fifteen to sixteen percent annually.
You can make the home loan repayment whenever you have cash in hand, but please make sure your dreams and goals are not hampered by doing so. Using the repayment amount as an investment tool can also prove to be a wise decision.