If you were thinking of prepaying your home loan, you are possibly on the right track since you would have realized the futility of paying huge interest on the home loan and the sizable cost of the loan overall. Prepaying the home loan automatically helps you save on interest costs and helps in lowering the EMI while helping you reduce the loan tenor. If you keep the EMI unchanged and continue making periodic prepayments, you can repay the home loan faster than you thought!
What experts feel is that prepayment essentially refers to paying an amount which is automatically deducted from the principal outstanding. The RBI (Reserve Bank of India) has now directed all banks to stop taking prepayment penalties in case you are linked to a floating rate of interest on your home loan and you may have to pay the same in case you are linked to the base rate, i.e. older rate for home loans.
You should consider prepaying your home loan and the faster you close out your home loan in life, the earlier you can invest that money for getting good returns and kick starting wealth creation. You can prepay whenever you have surplus funds in hand including bonuses and other windfall gains. However, make sure that you are prepaying in the earlier stages of the loan when the monthly EMIs mostly comprise of the interest component. In the later stages, they usually comprise majorly of the principal amount and you will not save as much as you expected on interest costs.
However, take a scenario where the home loan repayment is something that you are uber comfortable with, i.e. it does not even amount to 30% of your net monthly income. In such cases, you can continue with the home loan minus prepayments in order to maximize tax deductions on the home loan principal (Section 80C) and interest repayments per annum up to Rs. 1.5 lakh and Rs. 2 lakh respectively. Additionally, in such scenarios, you can consider investing the amount that you would have otherwise to prepay the home loan in any other return generating investment avenue that will help you bolster your savings considerably.
Take into account other options that you have and the interest that you earn and compare it with the interest costs that you will save. Obviously, take your time and go with the one that suits your financial needs the best at a particular point in time. Also, do not eat into all your savings for prepayments; maintain healthy cash flow and reserve funds before committing towards home loan prepayments.