Every borrower, at some point or another of loan repayment tenure, has entertained the idea of prepaying a debt, especially one that has 50 Lakh Home Loan EMI or even more. However, not everyone is aware of the prepayment tactics that are the most effective, nor are they aware of the behaviours that are suitable and inappropriate.
So, in order to get the most of part-prepayments, here is some guidance and some tips that you should follow.
When deciding between an EMI and a tenure reduction, take your cashflow into account
Customers with 40 Lakh Home Loan EMI who want to pay off a portion of their mortgage early have two possibilities. They can either shorten the time they have to repay their mortgage or cut their EMIs. Even though the second option would result in more interest payment savings, choosing between the two should mostly be based on your cash flow and financial situation.
If you took out a 30-lakh housing loan at a 10-percent-per-year interest rate over five years, and the loan balance is still outstanding at Rs. 28.25 lakh, you may be qualified for a home equity loan. By making a lump sum prepayment of Rs 3 lakh at the end of the fifth year, you can cut your interest payments by Rs 13.88 lakh and lengthen the term of your loan by 5 years and 1 month. Your interest savings, if you choose to keep the same loan period, would be Rs 6.96 lakh. If you decide to keep the same loan term, your EMI will drop from Rs 27,261 to Rs 24,365. If you are concerned that the environment of rising interest rates may impair your available income, lower your EMI payments.
When compared to the savings through HLBT, prepaying your 50 Lakh Home Loan EMI loans can unquestionably lower the overall amount of interest you pay; however, doing so by selling up your current investments can have a negative effect on your overall financial health. The ability to refinance your current mortgage and have it assumed by a different lender at a reduced interest rate is provided through a home loan balance transfer (HLBT), on the other hand.
Because of this, your interest payment will be lower, but your liquidity and existing assets won’t be affected. For instance, you could still save roughly Rs 4.68 lakh on interest payments if you refinanced your mortgage to a different lender for the remaining 20 years at, say, 9 percent per year without jeopardising your liquidity or existing investments. Compare the savings from a home loan balance transfer and the savings from part prepayments to make your choice depending on your liquidity and financial objectives (HLBT).
Keep your emergency savings intact
The purpose of an emergency fund is to pay for immediate expenses or to fulfil obligations during times of unemployment or income loss from a disability. The size of this fund should, at the very least, be sufficient to cover all of your expenses for at least six months, including enough money to pay your 50 Lakh Home Loan EMI for that period. If you use your emergency fund to pay off your mortgage early, a future unforeseen incident can compel you to take out high-interest loans or to sell off some of your present investments at a loss to make up for lost time. Never add to your existing pool of resources for making house loan prepayments with money from your emergency fund.
Refrain from cashing out your assets that were made with financial goals in mind
Your financial goals serve as a financial expression of your life ambitions. Making a corpus for your child’s future education or organising a down payment for your vehicle loan, loan against property, or other type of loan, like a 50 Lakh Home Loan EMI or 40 Lakh Home Loan EMI, are a few of the most popular goals we tend to make. If you redeem your existing assets that were made with that goal, you can later be obliged to take out expensive loans. In addition, a lot of loans demand a down payment or margin investment of a specific amount before they are approved. If you redeem the investments used as down payments or pay margin, you might not be able to accomplish these goals on time.
Consider the returns on your low-yield assets
Loans for 50 Lakh Home Loan EMI frequently have interest rates higher than those on the bulk of fixed income investments and savings accounts, while having one of the lowest interest rates of any retail lending products. Because they are not intended for any specific financial aim, excesses held in fixed income products like fixed deposits, bonds, and other equivalent instruments may be redeemed in order to make prepayments. On the other hand, long-term returns on equity investments frequently outperform mortgage interest rates by a significant margin.
A 3-lakh-rupee prepayment resulted in interest savings of 13.88-lakh-rupee in the event of a shortened loan term and 6.96-lakh-rupee in the case of a shortened EMI schedule in the previously mentioned example of a 40 Lakh Home Loan EMI or even 40 Lakh Home Loan EMI. For instance, if you placed that Rs 3 lakh in an equities mutual fund that generates a 15 percent annualised return for 15 years, producing a profit of Rs 21.41 lakh, your money would grow to Rs 24.41 lakhs at the end of the term.
Overall, the decision of making prepayment of a loan or other debt can, in general, be an excellent way to put your surplus cash to work and cut down on interest cost. But before you do so in a hurried manner, be very sure that you keep the aforementioned tips in mind if you want to get the most out of the use of this prepayment facility of loans.