The home loan is usually the largest loan in a borrower’s portfolio. While it helps build an asset, monthly mortgage-like installments (EMIs) can also claim a huge chunk of your salary, affecting your overall budget and making you nervous in the face of uncertainty.
It is always useful to repay your mortgage early. Here are five reasons why prepaying home loans makes sense.
This will reduce the total interest you pay: A portion of your EMI home loan is allocated to interest cost. When you prepay part of the loan, that part is used to repay the principal. As the principal decreases, the interest also costs. Paying off your home loan early can save you thousands of rupees over the life of the loan.
You will free up your cash for other purposes: Since you’re no longer making mortgage payments, you have more money in your pocket to spend on other things. You could, for example, use the extra money to pay for your child’s college education or focus more on goals like retirement.
“With this in mind, paying off debt sooner than expected using sound financial planning is recommended. Retirement will almost certainly result in the cessation of active income. Also, if you don’t have the right corpus, you may find it difficult to live happily after retirement,” says V. Swaminathan, CEO of Andromeda and Apnapaisa, a loan distribution company.
Your eligibility for other loans will increase: If you have a large home loan, upgrading your car with a car loan, or even taking out a personal or school loan, can become difficult. “When you take out a home loan, your chances of getting a personal loan or a car loan are somewhat reduced. When you have less existing debt, lenders are more likely to offer you a higher loan amount,” says Swaminathan.
This will reduce your credit usage: In these uncertain times where job losses have become commonplace, prepaying home loans faster allows you to reduce your use of credit. Also, the overall budget may become more manageable if you think job or income uncertainty may loom in the future.
General guidelines state that the total EMI one pays for all debts, including loans, credit cards, and the like, should not exceed 30-40% of your monthly income on hand. Any of the above may result in higher credit usage on your behalf. According to experts, the relationship between monthly EMI and monthly income should be less than 40% of monthly net income.
Fully owning your home is a great feeling: Last but not least, the freedom of not having to make home loan repayments is great. You will have peace of mind that the risk of not being able to repay your monthly EMI if you suffer a financial setback will be canceled. “If you are behind on your EMI payments, your house can be repossessed. There is no risk of losing your property to foreclosure when you repay your loan and own your home,” says Swaminathan.