When Should You Say ‘NO’ to Home Loan Prepayment?

Last Updated : Sept. 17, 2020, 1:30 p.m.

Paying off a home loan before the agreed tenure can reduce your interest payment drastically if you do it at the right time. You could also feel free with no EMI to pay afterward. Let’s be told that the process of paying off the loan before the original tenure is called a home loan prepayment. But there are instances where prepayment may not benefit you much. Doing prepayment at the wrong time could rob you of the opportunity to maximize home loan benefits and make you compromise on your future. So, when you look to prepay a home loan, check whether it’s the right time to do the same or not. In this post, we are going to discuss the times when you can avoid a home loan prepayment for your own good. Let’s read further to know the same.

Times When a Home Loan Prepayment May Not Prove Good

A home loan prepayment may not serve you much when only a few years are left, your retirement corpus won’t be much after paying a huge chunk and some other situations that we are going to discuss here. As these situations can be different from each other, it will be good to read them separately. Let’s get started without any further delay.

When Only a Few Years of Home Loan are Left

Home loans can be repaid via Equated Monthly Installments (EMIs) over a maximum of 30 years. Given the high loan quantum that one requires to buy a home, you will need at least 15-20 years to pay off the loan via EMIs. The average home loan amount can be INR 30-60 lakh considering the average property prices prevailing these days. If you read the home loan repayment cycle, you will find interest payments being more than the principal amount for around half the length of the loan journey. A year or two later, the principal portion will constitute more of your EMI.

So, if the home loan is say just 2-3 years away from getting over, you can reconsider your decision to prepay. The reason being most of your interest would have been serviced by that time. Even if there are savings, they would feel negligible. So, if you don’t see any problem in your job life (salaried) or business (self-employed), you can withdraw the idea of home loan prepayment. A look at the example below will help you understand the point we are making here.

Example – It’s been 2 years since you started paying a 20-year home loan of INR 50 lakh. The loan comes with an interest rate of 8.20% per annum. How will the prepayment fare if you do it after the loan completes 18 years compared to when you do after 12 years? Let’s find out in the table below.

From the table, you could see savings reduce significantly when you do a prepayment after 18 years compared to when you do it after 12 years. You might find the prepayment amount of INR 29,81,098 BIG to accumulate over 12 years. But if you save and invest properly, you can accumulate that sum. In case you could not accumulate the required sum, you can pay a part of that outstanding balance and still save a massive amount of interest.

Avoid Doing a Home Loan Prepayment If You Feel It Will Shorten Your Retirement Corpus Drastically

Saving for retirement days remains the priority of the working class. The more you save in your work life, the better your retirement life will be. But there’s no denying of the uncertainties stopping yourself from generating the required corpus to live your retirement days comfortably. And if your retirement corpus has not been what you wanted when you started investing for the same, doing away with a home loan prepayment can at least help the corpus grow more.

Cancel the Idea of Prepayment If Tax Saving is Your Priority

What draws one towards a home loan is the slew of tax benefits available on this financial product. Under Section 80C of the Income Tax Act, borrowers can get tax deductions upto INR 1.5 lakh on the principal repayment in a financial year. Whereas, tax deductions rise to a maximum of INR 2 lakh on interest repayments in a financial year under Section 24. On a let out property, there’s no upper limit on tax deductions regarding interest payments. These deductions are deducted from your annual gross income. The resultant amount, therefore, is the one on which taxes will be charged. So, with the tax deductions on offer, the eventual tax liability will be less.

People earning high can be subject to increased tax rates. But that can be reduced drastically by continuing with the home loan journey. The tax liability could even be ZERO if you have invested in other tax-saving products in addition to a home loan. In some cases, tax deductions on a home loan alone may be sufficient to bring down the tax liability to ZERO. So, if tax saving is your priority, you could reconsider your decision of home loan prepayment.

Conclusion

There’s no denying the massive savings on offer with a home loan prepayment if you do it at the right time. But if you are confronted with any of the above situations, you could think more than once before doing a prepayment. A part prepayment involving the payment of a portion of the outstanding home loan balance can still be recommended. Some lenders may fix a minimum limit on the part prepayment amount. So, check this with your lender when you do a part prepayment.