Five components to contemplate earlier than prepaying dwelling mortgage
When a lender sanctions you a house mortgage, your eligibility is determined based mostly in your present revenue. In majority of the circumstances, the house mortgage is taken in the course of the preliminary stage of 1’s profession the place the revenue will increase over time and the borrower can accumulate sufficient funds in the course of the tenure of the house mortgage. In such a scenario he faces the dilemma of whether or not to prepay the house mortgage by utilising the excess funds or to speculate the funds someplace and let the home loan run its course. Moreover, because the rates of interest have additionally gone up considerably of late, debtors are contemplating this choice significantly.
It isn’t a straightforward query to reply as the reply would rely on varied components. Let us try to grasp among the essential components that you need to take into account earlier than you make the choice both method.
Tax concerns
Tax impact considerably impacts all of the funding choices together with taking and repaying the house mortgage, so allow us to take into account this facet first. The principal compensation of dwelling loans is eligible for deduction beneath Section 80C as much as ₹1.50 lakh together with different eligible objects. You are additionally entitled to assert a deduction beneath Section 24(b) in for curiosity paid on the house mortgage. The quantity of deduction out there would differ relying on whether or not the property is self-occupied or set free. If you go for a brand new tax regime, no deduction is out there beneath Section 80C in respect of compensation of dwelling mortgage in all circumstances and for curiosity on cash borrowed for self-occupied home property. In the case of a let-out property, the deduction would get restricted to the taxable quantity of lease acquired beneath the brand new tax regime as you aren’t allowed to set off or carry ahead any loss beneath the pinnacle of revenue “Income from House property”.
So in case any part prepayment does not impact your tax deduction, you may consider repaying part of the home loan if you wish to.
Money needed shortly
While repaying your home loan, you need to take into account the need for funds in the immediate future for known reasons as well as for any emergency. Your decision whether to prepay at all and how much to prepay should be based on both these considerations. This is specifically important looking at the fact that home loans are available at relatively cheaper interest rates as compared to other loans specifically personal loans. Once you have repaid the home loan and need money later on you may have to borrow at a higher rate of interest.
Returns expected from alternative investment avenues available
While evaluating the option of prepayment of the home loan, please take into account the return potentials of the alternative products available for deployment of your surplus funds. In case the returns from such product are expected to be higher in the long run it does not make sense for you to prepay the home loan. One such alternative avenue available for investment is bonds being issued by NBFCs. The other alternative, depending on your risk profile, may be investing the money in equity through equity-oriented schemes of mutual funds for a minimum of 7-10 years as the returns on equity funds have been generally higher than home loan rates for such long-tenure. This makes sense as the home loan tenures are generally longer than 10 years in most of the cases. You need to compare the post-tax rates/returns in both the cases, to arrive at comparable numbers.
Any existing loan or credit outstanding
In case you have any other loan outstanding where the rate of interest charged is higher, it is no no-brainer to prepay all those loans/credits before you even think of repaying your home loan.
Psychological reasons
People of the old school of thought do not want to have any debt on their heads and specifically on their place of residence even if financially it does not make sense for them. Believe me, this psychological reason contributes to a significant number of home loan prepayment cases in India based on my interaction with many home loan borrowers. So the decision is yours whether you belong to the old school of thought or the new school of thought.
From the above discussion, it becomes clear that you need to consider various factors while arriving at the right choice for the prepayment of your home loan.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his Twitter handle.
Milestone Alert!Livemint tops charts because the quickest rising information web site on the planet Click here to know extra.
Download The Mint News App to get Daily Market Updates.
Updated: 21 Nov 2023, 12:53 PM IST