Should I pre-pay my home loan?

You have received your annual bonus or a large lump sum of money, you are contemplating whether to do a partial pre-payment of your home loan (HL) or invest it to achieve you other goals. You should access the situation and take a decision keeping in mind the following points:

The Income Tax Angle
If you do not feel that stressed out with the large amount of home loan standing as a sword over your head, then it makes economic sense to continue paying your regular EMI. As home loan in India offers tax benefits to the citizen availing it. Principal repayment of home loan is treated is an investment and is eligible for deduction under section 80 C. With respect to interest payment the deduction under section 24 is limited to Rs. 2 lakhs for a self-occupied property and with respect to a vacant or rented property there is no particular limit.
If your annual interest outgo on house property which is self-occupied is greater than Rs. 2 lakhs p.a. then it makes economic sense to prepay your home loan. In case the property is jointly owned, then all the joint holders are eligible for a deduction of Rs. 2 lakha each. In such a situation it would be logical to prepay only if your interest burden exceeds the total deduction available to all the owners jointly.
If you have a loan account with SBI Max gainer or similar products available in the market where you have the option to withdraw your prepaid amount whenever you have the requirement then it is advisable to prepay your HL after taking into account the maximum tax deduction available for a self-occupied of Rs. 2 lakhs.

Return on Investment:
If your post tax return on investment is higher than the effective cost of the loan, in such a situation it would be favorable to prepay your loan availed for purchase of residential property. If you’re in the highest tax bracket i.e. 30% and your present home loan interest rate is 8.5% then your effective cost of loan would be 5.95% (assuming simple interest) while the return on government tax free product like public provident fund is 7.8%. The other government partially tax exempt products such as Senior Citizens’ Saving Scheme and Sukanya Samriddhi Account will fetch 8.3%. Therefore, it is favorable to prepay your HL and divert the monthly surplus to investment.

If you’re a risk taker and you’re willing to invest in equity for a long term then too it is recommended to prepay your housing loan and utilize the monthly surplus towards investment in equity stocks / mutual fund.
When we compare home loan interest rates and choose the best housing loan available in the market we should know how to manage the loan account by using all the tax benefits, weigh the pros and cons and then take an informed decision. In conclusion, a housing loan as against personal loan i.e. unsecured loan or any other mortgage loan is a good liability as the tax benefits its offers, each one of us should use it to the best of our advantage.


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