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When is the right time to pre-pay your home loan?

If you have a home loan, you are probably seeing that your home loan rates are rising. In this context, you are faced with the question of whether to pre-pay their home loan, in order to reduce your outstanding liability to your lender at a faster pace. This decision also needs to be thought through using the lens of financial planning to ensure that you find the decision economically viable to do so.

The following are the 3 most important factors for you to consider:

Liquidity: Your decision to pre-pay should be based purely upon the availability of surplus funds, especially those which are not being used for any other purpose. However, if these funds have been allocated towards other important financial goals such as paying for your kids' education or their wedding, then don't compromise these goals just to pre-pay your loan.

If you have other personal loans or credit card debt, strongly consider paying off these debts before you pre-pay your loan. These debts are usually more expensive than home loans in India, so you will be economically better off settling these debts first.

If your home loan interest rate has been increased, you can also opt for partially pre-paying your home loan to ensure that your EMI’s are at the same level so as not to hamper your monthly cash outflow. Most banks do not charge prepayment penalties for partial prepayments.

Finally, before you take the decision to pre-pay your home loan, consider whether you have an available buffer for emergency situations.

Prepayment penalties and charges involved: Your lender might not be agreeable to your pre-payment and thus can charge you prohibitive penalties and charges. These fees might make your decision to pre-pay become economically unattractive. Understand what fees you might have to pay, and negotiate where possible to bring these down.

Refinancing option: You might consider pre-paying your loan because you want to refinance it at a cheaper rate with another lender. Recognize that you might end up having to pay two sets of fees – penalties to the original lender and processing fees to the new lender. Check if net of these fees it still makes economic sense to pre-pay or not.

Things to remember:

When is it wise to prepay your loan?

• If you receive a windfall gain, like an inheritance or a bonus
• When there are no penalties and you have cheaper options to refinance your existing loan with another lender
• When you have enough money after providing for emergencies as well as paying off high interest loans

When should you refrain from pre-paying your loan?

• When the prepayment penalties and charges are are high
• When you have more expensive debt such as personal loans or credit card debt outstanding
• When your other refinancing options do not justify prepayment

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