Interest rates for home loans have once again started increasing with the second consecutive repo rate increase by the RBI (Reserve Bank of India) over the last two months. The repo rate has been hiked by 25 basis points and stands at 6.5%. Banks have already started hiking their MCLR (Marginal Cost of Lending Rate) which indicates a rise in home loan interest rates. Banks like Karnataka Bank, Union Bank and Kotak Mahindra Bank have already increased their MCLR by 5-10 basis points and banks like HDFC have also increased home loan interest rates.
In the current rising rate scenario, what is a better option? Home prepayment or home loan balance transfer? When it comes to a home loan balance transfer, you can consider this in case you are repaying a high rate of interest. However, while you transfer your home loan, keep in mind that the difference between the new and old rates should be at least 50 basis points. If this is not the case, it may not be worth it. There are other expenses like processing fees which should be evaluated while transferring the loan to another financial institution. You also have to make sure that property documents are transferred to the new bank properly.
When it comes to home loan prepayment, you should keep a few things in mind. Firstly, you should prepay the home loan amount within the first 5 years of the loan tenor since this is the duration when the interest linked payout is the highest. With pre-payment of the principal amount in the early stages, you can lower the interest amount considerably. Also, keep tax benefits in mind since you can get up to Rs. 2 lakh on interest repayments annually under Section 24 (B) and up to Rs. 1, 50, 000 under Section 80C on principal repayments (though this section will cover deductions for investments, health insurance, etc.).
These tax benefits lower the home loan cost to a large extent. You can always prepay the loan amount but keep it strategic so that you can keep getting this interest deduction of Rs. 2 lakh annually.