5 Reasons Why Prepayment of Home Loan May Not Be the Best Option for You

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5 Reasons Why Prepayment of Home Loans May Not Be the Best Option for You

Have a surplus? Here are 5 reasons why prepaying your home loan may not be a good idea.

Most people only consider home loans to be a form of debt that they want to repay as soon as possible. While wanting to be debt-free is a great idea by itself, many people do not realise that home loans – if used correctly – can be a great tool to increase one’s assets.

Here are 5 reasons why not making prepayments towards your home loan, especially right now, may be a smart idea:

Reason # 1.
Right now, it is better to build an emergency fund or shore up your liquid assets with any surplus funds you may have. Considering that the economy may take some time to recover completely from the slowdown and some industries have been changed forever, being a bit cautious and building your wealth makes sense.

Reason # 2.
A home loan is one of the cheapest loans available to individuals since the interest rate is lower than other loans and it offers tax benefits. This is why it is better to prepay/repay other debt (if you have any) instead of your mortgage.

Reason # 3.
Your lender may charge you a fee on partial or full prepayment of the home loan. It is better to evaluate the cost of prepayment charges to see if it is worth it.

Reason # 4.
Check if the money you will use to prepay the loan will fetch you better returns elsewhere. For instance, if you have say, Rs. 5 lakh outstanding in your home loan repayable in 5 years, it may be better to put it in an investment option that gives you better ROI than your home loan interest outgo. And also choose to benefit from the tax incentives on your regular home loan EMI payments. So in effect, you can get double benefit.

Reason # 5.
The last point is a continuation of sorts of the previous one: keep in mind the time value of money. The value of Rs. 5 lakh (example we used in previous point) in your hands right now may be more than the current value of your total EMIs over the remaining tenure of the loan (since money loses value due to inflation).

There is no doubt that a debt-free life is a stress-free life but it is important to weigh your options before you make the final decision.
In the end, it is up to you to decide whether you want to prepay your home loan or not.

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