Due to skyrocketing real estate prices across all major cities of India, most prospective home buyers complete the purchase of their new abodes through a Home Loan. As the repayment tenor of a Home Loan can extend up to 30 years, you will have to serve the EMIs for almost your entire working life. When a significant portion of your salary would be going towards Home Loan repayments, you might struggle to allocate funds to other investment options. While having your own home is emotionally and socially very essential, so is having a corpus at the time of retirement.
Therefore, you might be contemplating about foreclosing your Home Loan to get more flexibility with your future financial planning. As per a directive in 2012, RBI instructed financial institutions to stop charging a foreclosure fee against pre-payment of Home Loans availed at a floating interest rate, making Home Loan offers even more attractive for borrowers. So, before making a final decision regarding this matter, you need to contemplate both the advantages and disadvantages of Home Loan pre-closure. After all, it will have a profound impact on your future financial planning.
While the conventional wisdom states that you should repay any loan as soon as possible, the decision is not that simple in case of a Home Loan.
Several factors need to be considered before making a final decision regarding a loan foreclosure, such as:
Interest rate structure: The interest rate structure applicable to your Home Loan is also a very crucial factor. If your Home Loan has been availed at a floating interest rate structure, you will not have to pay any foreclosure charges. But if you have availed your Home Loan at a fixed interest rate structure, you will have to pay foreclosure charges. For instance, in the case of an Aditya Birla Home Loan, the foreclosure charges for floating interest rate Home Loans are nil. Though, in case of a fixed rate Home Loan, the company charges between 2% to 4% of the outstanding principal as a foreclosure charge.
Available investment opportunities: If you have an investment opportunity available where the returns are higher than Home Loan interest rates, then opting for a Home Loan foreclosure is not a good idea. Home loan interest rates are amongst the lowest interest rates for any loan, making them highly affordable. Most investments in equity or mutual funds have yielded annually higher than 12% over the last five years. In such a situation, you should instead invest your surplus money and earn higher returns. But if you are already invested at par, you can certainly use your spare funds to pre-close a Home Loan.
Existing loans: If you have any existing loans or Credit Card dues, it is better to use the spare funds to repay those. Interest rates against Personal Loans and Credit Cards are significantly higher than a Home Loan. For instance, Axis Bank Home Loan interest rates start from 9.40% (base rate linked), whereas Axis Bank Personal Loan interest rates start from 12% per annum, and interest rates against Axis Bank credit cards start from 41.75% per annum. So, you can analyse that your money is put to better use by paying-off higher interest rate bearing debts.
Future requirements: Before you rush to pay-off your Home Loan, you need to factor in your future financial requirements. There are various life events for which you will require significant amounts of money, such as marriage, higher education, overseas travel, etc. If you lock-in all your money with your home, then you will struggle to take care of these requirements. So, opt for Home Loan pre-closure only after you have set aside adequate sums of money for these requirements. Moreover, if you are considering changing jobs or your industry is facing a recession, having spare funds in your account will be highly useful.
Taxation benefits: Home loans entitle you to significant benefits on your Income Tax liabilities. You can claim a deduction of up to Rs. 1.50 lakhs on the repayment of principal amount under Sec 80C of the Income Tax Act, 1961. Moreover, you can claim a deduction of up to Rs. 2 lakhs for the interest repayment under Sec 24 of the Income Tax Act, 1961. If you fall under the 30% taxation bracket, you can save up to Rs. 1.05 lakhs against your income tax liabilities with a Home Loan. Moreover, to achieve its goal of housing for all, the government might offer additional tax benefits this FY. So, if you wish to continue enjoying these taxation benefits, it is advisable to continue with your Home Loan.
Source of funds: Whenever you request to foreclose your Home Loan, the lender will ask for the source of funds. You need to provide your Savings Bank Statements for the last six months. Moreover, even the Income Tax Authorities keep a close eye on Home Loan foreclosure cases. Moreover, if you are foreclosing the Home Loan within 5 years of purchasing the property, you will have to reverse the Income Tax benefits availed. So, if you cannot explain the source of your funds or wish to avoid the hassles, continue repaying the Home Loan through EMIs only.
Considering all these factors, you can make a confident decision to continue or foreclose your Home Loan.
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