Do you know for your home loan application to be approved; a lender looks at the various aspects? In most cases, the eligibility for a home loan is determined by your existing income. This is one of the primary reasons why some people prefer to avail of home loans during the early stages of their profession, wherein one’s salary grows over time and the borrower can accrue sufficient cash during the term of the loan. In such a case, s/he must decide whether to prepay the home loan with the surplus funds or to invest the funds elsewhere and let the PNB housing home loan run its course. Furthermore, because interest rates have recently risen dramatically, borrowers are taking this decision seriously. It is a difficult question to answer because the answer is dependent on a number of things. Let us try to comprehend some of the crucial elements you should think about before making a selection.
Buying a house is not only the biggest ambition of our lives, but it is also the most significant financial task of our lives. Prepaying your PNB housing home loan early is one of the most systematic methods to save money. You can prepay the entire outstanding home loan amount or a portion of it to save on PNB housing interest rate payments. However, there are opposing viewpoints on this as well.
Is it a good idea to pay off the loan early?
The home loan PNB housing interest rate component is larger in the early years but gradually decreases toward the end of the loan period. When you prepay a PNB housing home loan, the money goes towards repaying the principal amount. The following month’s PNB housing interest rate would be computed on the outstanding principal amount of the home loan. You can significantly cut the interest component of your home loan if you prepay it. Since the main amount is paid more quickly, it allows you to close the home loan sooner.
The PNB housing interest rate will be calculated only on the amount remaining after your prepayment is applied to your outstanding principal. As a result, the PNB housing interest rate component will be greatly reduced, and the principal will be repaid more quickly throughout the remainder of the loan’s duration. You cannot be charged for prepayment if you take out a floating-rate loan. However, if you have chosen a fixed-rate loan, there may be a prepayment fee.
Should you pay off the loan early?
Depending on your financial situation, consider prepaying your home loan. For example, if you receive a windfall or a bonus, you could prepay your home loan. Furthermore, banks and NBFCs do not impose a prepayment penalty on floating-rate house loans.
If you have a large PNB housing home loan or the bank is charging you a higher home loan rate, prepaying your home loan may be a good idea. However, if the bank charges you a lower home loan rate and you receive significant tax benefits on home loan principal and interest, you may continue with the home loan.
Tax implications to know beforehand
Taxation has a huge impact on all investment decisions, including the acquisition and repayment of a PNB housing home loan, so let us start with that. The principal repayment of home loans, together with other qualified purchases, is deductible under Section 80C up to 1.50 lakh. You may also claim a deduction for the PNB housing interest rate paid on a house loan under Section 24(b). The amount of the deduction allowed depends on whether the property is self-occupied or rented. If you choose a new tax system, no deduction is available under Section 80C for home loan repayment or interest on money borrowed for self-occupied dwelling property in any case. In the event of a rented house, the deduction would be limited to the taxable amount of rent paid under the new tax regime, as you are not permitted to set off or carry forward any loss under the income category “Income from House Property.”
So, if any partial prepayment does not affect your tax deduction, you may contemplate repaying a portion of your house loan if you so desire.
Consider the following factors before you prepay your home loan
Money can be urgently required somewhere else: While repaying your PNB housing home loan, you must consider the requirement for funds in the near future for recognized causes as well as any emergencies. Both of these factors should influence your decision on whether to prepay at all and how much to prepay. This is especially significant given that home loans have lower PNB housing interest rate when compared to other types of loans, particularly personal loans. If you need money after you have repaid your house loan, you may have to borrow at a higher interest rate.
Expected returns from possible alternative investment avenues: Consider the return potentials of the alternative products available for mobilization of your surplus cash while evaluating the option of prepayment of the PNB housing home loan. If the profits on such a product are likely to be higher in the long run, prepaying the home loan makes no sense. Bonds issued by NBFCs are one such alternative route for investing. The other option, depending on your risk profile, is to invest the money in equity through equity-oriented schemes of mutual funds for a minimum of 7-10 years, as equity fund returns have historically been greater than home loan rates for such long-tenure. This makes sense given that the majority of home loan terms are greater than ten years.
Any current loan or credit that is still due: If you have any other debts with higher PNB housing interest rate, it is a no-brainer to pay off those loans/credits before you even consider repaying your home loan.
Psychological Reasons: People of the old school of thought do not want any debt on their heads, particularly on their place of home, even if it makes financial sense for them. This psychological explanation contributes to a high proportion of home loan prepayment situations in India.
It is evident from the preceding discussion that you must examine a number of aspects when deciding how to pay off your house loan.
The disadvantage of prepaying a home loan is that you are eligible for a tax deduction of up to 2 lakh per year on PNB housing interest rate repayments. If you are in the upper-income tax bands of 20% or 30%, it can help you save between 40,000 and 60,000 per year. If you pay off your mortgage early, you could lose this tax benefit. And, remember, do not prepay home loans with money set aside for important financial goals.