Invest in mutual funds to gain more than home loan interest
Individuals who do not have enough cash at hand should never opt for foreclosing the loan
Home loans help buy your dream home. Many salaried people get a home loan just after bagging their job. However, whether this can be a good or a bad idea depends on the circumstances. As a loan is a very stressful thing, many people might want to get rid of the debt burden as soon as possible that is before the completion of the loan term. However, there are pros and cons of closing home loan early. Let’s analyze in detail to get a clearer picture, good riddance for mental peace and some other benefits as well!
What is Foreclosure of a Loan?
A loan foreclosure can be defined as the early repayment of a loan either in full or part payment of the sum left to pay at that point of time to get certain benefits like lowered interest rates and of course getting rid of the loan burden earlier than what stipulated in the loan agreement.
In India, the average tenure of a home loan is generally around the 8-year mark, which is a considerable amount of time for most to keep paying costly loan EMIs.
Do Home Loan Foreclosures Really Make Sense?
Home loans entail robust amounts compared to other types of loans and subsequently involve higher premiums by way of interest. Therefore, closing home loans early makes sense in a number of situations.
Earlier, home loan prepayment was chargeable by banks, but after a recent ruling by the Reserve Bank of India (RBI), it has been abolished since. But does it mean everyone should start prepaying their loans?
Well, it depends. One should be holding a large amount of money, which he probably didn’t have at the time of applying for the loan to pay the loan back with interest. Also, the prepayment amount is generally taxable.
Home loanees are therefore understandably often caught up in dilemma whether to foreclose the loan to save the interest on the loan that cause a lot of headache and heartburn or to save the tax to be paid while closing it.
Tax Benefits of a Home Loan
Tax benefits on home loans include one deduction under Sec 80C of the Income Tax Act, 1962 for the principal repaid and another deduction under Section 24 for the interest paid on loan.
The highest tax relief on the interest is Rs. 2 lakh annually if the loanee is paying for a self-occupied house that. Thus, if the interest amount the loanee pays on the home loan is greater than the tax deduction, it’s generally advisable to foreclose the loan using the surplus money.
Then again, if the loaned property has been rented out, the entire interest payable might be claimed as a tax deduction. In such cases, foreclosing the loan is not advisable as the tax benefits will reduce the effective interest rate.
Who SHOULD Foreclose a Home Loan?
Foreclosure of a home loan helps in preventing the total cost incurred on the property from rising further. As an instance, let’s assume a person took 70% of the cost of the house he’s buying as the loan. In the long run, he will end up paying considerably more than the cost of the house. And all the while he was paying it, the property suffered 2-3% depreciation already, although this varies as per the geographical location of the property. It’s wise to repay the loan prematurely because the interest accrued on loan considerably chips away the returns from the property should the loanee ever decide to sell it.
Also, if the loanee suddenly gets a large amount of money from the maturation of an FD or heavy returns from earlier investments, it makes sense to immediately close an existing home loan as it is a better idea to use the liquid funds received to save on the interest costs.
For those with little job security, foreclosing the home loan makes a hell lot of sense. This is self-explanatory. If for whatever reason, the person loses job or is in desperate need to change it, he will immediately be in hot waters managing the normal personal or family expenses and the loan EMI expenses with no ready source of income at hand.
Who SHOULD NOT Foreclose a Home Loan?
Understandably, there are also circumstances when a person should not foreclose their home loan.
Those loanees who want to occupy the house for a long time and with no intention or need to sell need not foreclose the loan given that they earn enough monthly to manage all of the expenses, including the home loan EMI.
Individuals who do not have enough cash at hand should never opt for foreclosing the loan, as this would not satisfy the purpose of taking the loan in the first place. They should better pay off monthly EMIs and gradually see the loan out after the agreed loan period.
People having a good degree of job security do not need to close their home loans early. They will most likely always have enough to pay off the loan EMIs. They would not have any need to shell out huge amounts to foreclose the loan.
If someone has multiple loans such as personal loans, car loans, educational loans etc. along with the home loan, he/she should never pay off the home loan first. This is due to the simple reason that home loan interest is generally lower than these loans and normally has bigger tenures resulting in lower EMIs. That said, it always makes sense to close the high-interest cost loans first.
Finally, even if they have lumpsum amounts at hand, they would better invest in high return funds like mutual funds to gain more than what they lose by way of the home loan interest, thus making sure the home loan interest accrued will not sting in the long term. Talk to advisors for current investment options giving high returns.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)