Owning a sweet abode gives a sense of achievement but seeing the skyrocketing prices of realty, this comes with a huge cost, typically in the form of a mortgage. Home loan equated monthly instalments (EMIs) can take a significant portion of your salary, hurting your whole budget and making you anxious in the face of uncertainty, even while they help you grow an asset.
You would have to pay the EMIs for virtually the entirety of your working life because the repayment period for a home loan can last up to 30 years. You could find it difficult to allocate money to other investing possibilities when a sizable amount of your income would be going toward home loan repayments. While owning your own house is crucial for emotional and social well-being, having a corpus when you retire is just as important. As a result, you may be thinking about foreclosing on your mortgage in order to increase your financial planning freedom.
Home Loan offers became even more alluring for borrowers after the RBI advised banking institutions to stop imposing a foreclosure fee against prepayment of loans obtained at floating interest rates. Therefore, you should think about the benefits and drawbacks of home loan pre-closure before making a final decision about this topic. After all, it will have a significant influence on your financial planning in the future.
So, is it advisable to pre-close your home loan?
While it’s generally accepted that you should pay off loans as quickly as possible, choosing when to get a home loan is more complicated. Before making a final choice on a loan foreclosure, a number of criteria need to be taken into account, including:
Structure of interest rates:
An extremely important consideration is the interest rate structure that applies to your home loan. You won’t be required to pay any fees associated with foreclosure if your home loan was obtained with a flexible interest rate structure. However, you will be required to pay foreclosure fees if you took out your home loan at a fixed interest rate structure. For instance, in the case of an Aditya Birla Home Loan, there are no fees associated with foreclosure for Home Loans with adjustable interest rates. Although the corporation assesses a foreclosure fee of 2% to 4% of the outstanding debt in the case of a fixed rate home loan.
Choosing a home loan foreclosure is not a wise move if you have an investment opportunity where the returns exceed home loan interest rates. Home loans are quite reasonable because they have some of the lowest interest rates of any type of loan. Over the past five years, the majority of equity and mutual fund investments have produced annual returns greater than 12%. Instead, you ought to put your extra cash to work by investing it to get better returns. However, if your investment is already at par, you can surely use your extra money to pre-close a mortgage.
Other outstanding debts:
It is preferable to use the extra money to pay off any existing loans or credit card balances. Personal loans and credit cards have much higher interest rates than home loans do. For instance, interest rates on Axis Bank Home Loans begin at 9.40% (base rate linked), while those on Axis Bank Personal Loans begin at 12% annually and those on Axis Bank Credit Cards begin at 41.75% annually. You might therefore conclude that paying off loans with higher interest rates is a better use of your money.
Take into account your future financial needs before paying off your mortgage quickly. You will need a lot of money for a variety of life events, including marriage, higher education, international travel, etc. You will struggle to meet these needs if you lock all of your money away in your home. Therefore, only choose to pre-close your home loan once you have saved up enough money to cover these costs. Moreover, having extra money in your account would be quite helpful if you are thinking about moving employment if your industry is through a recession.
You are entitled to large tax savings if you borrow money for a home. In accordance with Section 80C of the Income Tax Act of 1961, you are eligible to deduct up to Rs. 1.50 lakhs from the main repayment amount. Furthermore, under Section 24 of the Income Tax Act of 1961, you may deduct interest payments up to a total of Rs. 2 lakhs. With a home loan, you can reduce your income tax obligations by up to Rs. 1.05 lakhs if you are in the 30% tax bracket. In addition, this fiscal year, the government might extend more tax breaks in order to fulfil its commitment to housing for everybody. So it is advised to keep up with your home loan if you want to keep receiving these tax benefits.
Source of cash:
The lender will inquire about your source of funds whenever you want them to foreclose your mortgage. Your most recent six months’ worth of savings bank statements must be provided. Additionally, the Income Tax Authorities also closely monitor situations of home loan foreclosure. Additionally, you must reverse the income tax benefits received if you are foreclosing on the home loan within five years of buying the property. Therefore, continue paying back the home loan simply through EMIs if you are unable to identify your financial sources or prefer to avoid difficulties.