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Is it wise to prepay home loan — explained

Buying a house is not merely a lifelong dream but also one of the most substantial financial responsibilities that individuals undertake. Several homeowners dream about finishing off their mortgages sooner and breaking free from the bonds of debt. 

Benefits of prepaying home loans

Making principle prepayments on your home loan is one excellent approach for accomplishing this, said Jetaish Gupta, Co-Founder & Director, of Adore Group. 

When you choose to pay regular payments every month on your house loan, a large amount of the first installments go towards interest, whereas a lesser portion goes towards principle. This dynamic shifts as the loan term progresses, having more of every installment moving towards the principle. You may, however, speed up your repayment process and drastically lower the total interest paid by making additional principle payments.

Early in the home loan tenure, the interest component is higher, tapering off over time. “By prepaying, the principal sum is reduced, leading to diminished interest calculations in subsequent months. This strategy expedites loan repayment and minimizes the interest burden,” said Amit Gupta, MD, SAG Infotech.

In cases of floating-rate loans, prepayment is fee-free; yet, fixed-rate loans may incur prepayment charges. This approach, which divides EMIs into lower interest and higher principal portions, aids in interest reduction and swifter principal repayment, added Gupta.

Prepayment leads to earlier loan completion than anticipated, making it an advantageous but often overlooked option.  Deciding whether to prepay depends on individual financial situations.  As per Amit Gupta, large loan amounts with high rates could warrant prepayment, whereas lower rates with tax benefits might justify retaining the loan.

“Consider the ease of being free of payments on your mortgage to worry about for a long time. The reduced loan term will provide the homeowner with not just financial independence as well as peace of mind, freeing them to solely concentrate on other essential life goals,” said Subhash Goel, Director of Goel Ganga Developments.

The prospect of EMI-free months and debt relief looks quite tempting, but its viability hinges on individual circumstances. Funding sources, bonuses, and savings must be scrutinized before tapping emergency funds. 

Meanwhile, the Reserve Bank of India (RBI) has issued detailed guidelines to reset floating-interest rates on Equated Monthly Instalments (EMI)-based personal loans. “Any increase in the EMI/tenure or both on account of this shall be communicated to the borrower immediately through appropriate channels,” RBI said in a release.

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Updated: 26 Aug 2023, 02:44 PM IST

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