Should you repay your mortgage early? Experts explain the pros and cons

Is it good to prepay your mortgage?

Archit Gupta, Founder and CEO of Clear, said the interest component on home loans is higher in the early years but continues to decline towards the end of the home loan term.

If you repay your home loan early, the amount is used to repay the principal amount of your home loan. Interest for the following month would be calculated on the principal amount of the outstanding home loan. If you prepay the home loan, you can significantly reduce the interest component of the home loan. The principal amount is repaid faster, which helps you close the home loan sooner.

Gaurav Kapoor, director and co-founder of Fincorpit Consulting, explains that interest will only be calculated on the amount remaining after your prepayment has been applied to your outstanding principal. As a result, you will significantly reduce the interest component and the principal will be repaid more quickly for the remaining term of the loan.

“On the other hand, if you take out a variable rate loan, you cannot be charged for a prepayment. Be aware, however, that if you have taken a fixed rate loan, there may be a prepayment charge. lower interest part and two, higher principal part – in the next EMI. They could help you lower the interest significantly, towards the remaining term of the loan and repaying the principal at a faster rate,” Gaurav said. Kapoor.

He added that because of your prepayment, you finished your loan long before you thought at first. Therefore, prepayments would be an effective thing that customers might not know or think about to choose them. Regularized advance micro-payments are automatically debited from your bank account, so this is the best option.

Should you repay your mortgage early?

You may consider repaying your home loan early, depending on your financial situation. For example, you could prepay your home loan if you get a windfall or bonus. Also, banks and NBFCs do not charge you a prepayment penalty on prepayment of variable rate home loans.

“If you have a large mortgage amount or the bank charges you a higher mortgage rate, it may be a good idea to pay off your mortgage early. However, you can continue with the mortgage if the bank charges you a lower home loan rate and if you get significant tax benefits on home loan principal and interest,” said Archit Gupta.

Repayment of a mortgage: the factors to take into account

Prepaying a home loan can be quite tempting considering the lack of monthly EMI payments and the possibility of being debt free. However, there are some factors to consider when making this big decision. Pratik Daudkhane, co-founder of Decentro says there is no one-size-fits-all solution to this problem.

Source of funds to repay the home loan

If you’re thinking of partially depleting your emergency corpus, I wouldn’t recommend it, Pratik Daudkhane said.

Prime

If you received a bonus, you can assess the returns in the capital markets instead of prepaying. If the returns are higher than the interest rate, the market returns will cover the interest cost and therefore you will have more disposable income from your fixed income (eg salary). However, investing in the capital markets can be risky and higher returns cannot be guaranteed.

Savings

In some cases, the interest rate of the home loan is higher in the initial term. If you have enough savings to set aside a small amount each month or year, you can save significantly on interest charges over the life of the loan.

How deposits work

Assume a loan of ₹20 lakh was taken by you for a term of 20 years at an interest rate of 7.5%. While your monthly IME is ₹16 111. You end up paying ₹38.7 lakh after 20 years ordered your interest charges to be around ₹18.7 lakh on a loan of ₹20,000,000. If we see this example, that’s a lot of money for the payer, basically double the amount withdrawn.

Suppose you have a home loan of ₹25 Lakh for a term of 20 years at an interest rate of 8%. Your EMI home loan comes to ₹20 911. Prepayment of a lump sum of ₹5 Lakh after 12 months saves more interest ₹12 Lakh.

Benefits of prepaying a home loan

–You could prepay your home loan if you are close to retirement to eliminate debt and enjoy a peaceful retirement.

-As banks charge higher interest rates for home loans than you can earn on most financial instruments, it might be a good idea to prepay the home loan and save on interest rather than paying it off. invest in fixed income instruments that offer lower yields.

Disadvantages of prepaying a home loan

– You benefit from a tax deduction up to ₹2 Lakh per annum on interest payments on home loans. It helps you reduce taxes by approximately ₹40,000 and 60,000 per year if you are in the top 20% and 30% tax brackets. You risk losing this tax benefit if you repay the mortgage early.

-Do not prepay home loans with money you have invested for vital financial purposes.