Is It a Good Idea to Pre-close a Home Loan?

Whether it is a good idea to pre-close a home loan is an old debate. Some experts believe that home loan pre-closure is the best way to live a debt-free life and start preparing for the second phase of life, whereas others disagree with this and believe that it might not be the right choice always. While it is true that prepaying your debts makes you debt-free and welcomes investment opportunities. Whether it is a good idea for you depends upon your unpaid amount, remaining loan tenure, repayment capacity, other investment opportunities, source of funds for repayment, and pre-closure charges. In most cases, when there is adequate loan tenure left, it makes sense to pre-close the home loan.

Here are certain factors you must consider before pre-closing a home loan:

1. Interest Structure:

While the home loan interest rates seem affordable, the loan amount is usually very high. That said, the home loan interest cost constitutes a considerable portion of your EMIs. Whenever you make a part-payment of a home loan, the payment goes towards the principal amount. As the principal amount gets reduced, the interest cost towards the principal also reduces. By prepaying your home loan, you can save a considerable amount over the loan. However, before opting for a home loan pre-closure, you should check your interest structure. If you are paying a floating interest rate on your home loan, you will not have to pay any prepayment or foreclosure fees. Whereas, if you are paying a fixed interest rate on your home loan, you will have to pay a considerable amount on loan prepayment or foreclosure. Pre-closing your home loan might not make sense if the prepayment or foreclosure charges are very high.

2. Reduced Debt Burden:

Since a home loan is a big loan, it carries a large portion of your monthly repayments, which can tighten your monthly budget and create a financial burden. Hence, it makes sense to opt for a home loan pre-closure if you want to reduce your debt burden. You can also choose to pay more than your fixed EMI as and when you have surplus funds if you do not have the right source of funds to foreclose the home loan at once. While it will take more time to pre-close the loan, it will help you become debt-free sooner than expected and reduce your debt burden at your pace.

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3. Other Existing Debts:

While repaying your home loan reduces your debt burden, it is necessary to consider other existing loans and credit card dues, if any. Since credit cards and personal loans carry high-interest rates and other charges, many financial experts advise clearing these high-cost dues before moving to a home loan. However, take note that many lenders charge considerably high pre-closure and prepayment charges on personal loans. Hence, you must check these charges and other prepayment terms before opting for personal loan pre-closure.

4. Other Life Goals:

As you pre-close your home loan, you no longer pay monthly instalments. This amount can be used for other important things. For example, you can spend this amount to pay your child's school fees, buy a car or other necessary products and services. Apart from spending, this amount also opens better investment opportunities. You can invest the amount you save through home loan pre-closure in carefully selected equity mutual funds that can help you build a sufficient retirement corpus, which will ensure you get adequate income even after retirement. To live happily after retirement, it is best to get debt-free well before retirement and have a solid retirement plan.

5. Future Financial Requirements:

If you have any financial requirements in the near future, such as a child's marriage, a child's higher education, etc., it might not make sense to put all your money towards home loan repayment. Make sure you do not liquidate investments made for these specific requirements for clearing off your home loan. Putting all your savings and investments towards home loan repayment can result in a financial crisis in the future, and you might have to avail of other costly loans.

6. Debt-to-income Ratio:

Having big loans increases your debt-to-income ratio, which compares how much you owe each month to how much you earn. A high debt-to-income ratio can affect your credit score and reduces your chances of getting unsecured loans like personal loans. Pre-closing your home loan helps you reduce your debt-to-income ratio, and you can get qualified for other loans.

7. The Feeling of Achievement:

Most importantly, not having to pay the home loan EMI brings peace of mind to the homeowner. Knowing that your house is completely yours, without any obligations, is a great feeling. On the contrary, when you are paying home loan EMIs, the very idea of owing money to somebody creates a sense of dread and the feeling of a large weight on your shoulders. Hence, this feeling alone is a reason for many borrowers to prioritise paying off their debts fully.

8. Tax Implications:

A home loan can save a significant amount of tax outgo as it comes with multiple tax benefits. The interest paid in a financial year is eligible for deduction of up to Rs 2 Lakhs under Section 24 of the Income Tax Act, 1961. The maximum deduction of Rs 2 Lakhs is applicable only for the interest paid on a self-occupied house property. And there is no upper limit on the let-out property. You can claim the deduction from the year the construction of the house is completed. Furthermore, the principal amount paid is eligible for a deduction of up to Rs 1.5 Lakhs under Section 80(C). However, you cannot sell the property within 5 years from the date of possession. Otherwise, it will be considered income in the year of sale. So, if you wish to enjoy the tax benefits of a home loan, you may consider continuing with your home loan.

To conclude:

Repaying your dues as early as possible is a great habit that injects financial discipline and gives peace of mind to the borrower. However, as discussed, before you break your other financial plans to pre-close your home loan, it is advisable to consider all the points mentioned above to avoid any regrets in the future. PersonalFN's SMART Fund Explorer can help you plan home loan foreclosure or achieve any other goals, such as buying a house or car, child's education, retirement, etc. with a diversified portfolio of carefully selected equity mutual funds.

Warm Regards,
Ketki Jadhav
Content Writer