Planning to close your Home Loan Early?
A home loan is a considerable sized loan wherein the loan quantum runs into tens of lakhs of rupees. Since the loan is considerable in size, long repayment tenure is also allowed to borrowers so that they can repay the loan in an affordable manner.affordably. However, the repayment of the home loan includes paying the principal and the interest and if you choose long repayment tenure, you also pay the interests for a longer period of time. That is why experts believe that paying off the home loan early on has various benefits. Does it? Let’s understand –
Benefits of Paying the Home Loan Early
You save on the interest cost
If you delay the repayment of your home loan, you would have to pay interests for a longer period of time. Interest is calculated on the outstanding balance of your loan and if you pay in relatively smaller amounts, the outstanding balance does not reduce considerably. In fact, in the earlier years of the loan, since the outstanding balance of the loan is high, the EMIs mostly consist of the interest component of the loan. As the years go by and the outstanding balance reduces, the interest reduces too. This is why, when you prepay a part of the loan, you reduce the outstanding balance of the loan and, therefore, reduce the interest payments. If you aim to pay off the loan early, you can save on the interest payments which are an added expense on the loan and are paid from your pockets.
You can save additional tax
It is no secret that home loans save you tax. The principal repaid is allowed as a tax deduction under Section 80C up to INR 1.5 lakhs and the interest paid on the loan is allowed as a deduction under Section 24 up to INR 2 lakhs. When you choose to repay the home loan early, you tend to increase the EMI payments or prepay the loan. In both these circumstances, the amount of principal repaid as well as the interest component of the loan increase. When the principal and interest increase they let you to avail a higher tax deduction. For instance, if you were earlier paying INR 1 lakh in principal and INR 1 lakh in interest and you increase these amounts to INR 1.5 lakhs each, you avail an additional tax deduction of INR 1 lakh (INR 50,000 on the principal and INR 50,000 on interest). The additional deduction that you can claim would reduce your taxable income and would, ultimately, bring down your overall tax liability. A lower tax liability would help you in saving money.
So, these two are the main monetary benefits which you can enjoy when you pay off your home loan in the early days. Your credit score might also improve when you pay the loan early and a better score would let you avail future loans at lower interest rates. Thus, an improvement in the credit score also saves you money, though indirectly.
So, try and repay your home loan early if it is financially feasible. Increase the home loan EMIs over time or prepay a part of the loan if you have surplus funds and get rid of your liability earlier.