If your total interest outgo is greater than the amount of tax deduction then it is wise to invest the surplus money in closing/reducing the home loan. … In such cases, it is not advisable to foreclose the loan because the tax benefits will bring down the effective interest rate.
Considering this, does home loan prepayment reduce interest?
“If you plan on prepaying your home loan, the advantages include savings on interest expenditure, reduction of principal outstanding, financial stability and effect on credit rating. Moreover, many banks do not levy charges for prepayment.
People also ask, how do I repay my home loan smartly?
Tips to Reduce your Interest Burden While Repaying Home Loan
- To ensure a lower interest payout, decrease the interest rate of your loan. …
- Ensure quick repayment of the principal amount. …
- If you can, then pay more than the regular EMI. …
- You can also pay one more EMI (than the usual number of EMIs) every year.
Is it better to repay housing loan?
As there are tax benefits up to a limit on home loan interest and principal repayment, it’s better to continue with the repayment schedule to enjoy the benefits instead of repaying in lump sum.
Costs of prepayment
There will be a small cost towards simple interest, which also can be minimised by making the prepayment early in the month. But lenders may levy a prepayment penalty of around 2% of the amount prepaid in fixed rate home loans.
With part-prepayment, you get to repay a certain lump sum amount from the total loan amount. As you can see in the example above, by making a full pre-payment of the balance (principal) amount after the end of 10 years, Mr X is saving Rs 7,38,825 in interest and about 119 months in tenure.
The total repayment period of a Home Loan taken is called ‘Tenure’ of the Loan. Home Loan tenure can be
|Tenure||Max Home Loan Amount||EMI Amount|
|20 years||Rs. 44.70 Lacs||Rs. 36,010|
|25 years||Rs. 48.70 Lacs||Rs. 35,990|
|30 years||Rs. 51.50 Lacs||Rs. 36,010|
Home loan preclosure fees of banks – 05 Jan 2022
|Bank||Preclosure charges||Prepayment charges|
|LIC Housing Finance Limited||Nil to 2% of the prepaid loan amount||Nil to 2% of the prepaid loan amount|
|Federal Bank||Nil to 3% of the outstanding balance||Nil to 3% of the outstanding balance|
|State Bank of India||Nil||Nil|
Choosing between EMIs and tenure reductions
While a reduction in the loan tenure will result in greater savings in interest pay out, opting for the EMI reduction option will lead to higher disposable income.