Pros and Cons of Home Loan Prepayment

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Is It Better To Prepay Home Loan
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Pros and Cons of Home Loan Prepayment
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It is an interesting irony with Home Loans. Till
the time a person does not have a home loan, he
aspires to take one as soon as possible in order
to purchase a home. Once he has taken a home
loan, the first priority in his life becomes to
repay his home loan even though it may come with
a cost of his reduced standard of living.
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However there are a group of thinkers who do not
believe in the philosophy of repaying back their
home loans. Lets discuss the pros and cons of
repaying a home loan and I will leave it to the
readers to decide which is the best option
suitable for them.
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1. Reduction of Interest Payouts The most
obvious benefit out of prepayment is that your
interest payout reduces. Prepayment of home loan
results in an immediate reduction of the
outstanding principal on the home loan which
results in less interest being accrued on the
loan account. For example, if you have an
outstanding loan of Rs. 10 lacs at 10 interest,
you would be annually paying approx Rs. 1 lac
interest.
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2. Prepay without reducing the tenure Is It
Better to Prepay Home Loan, you have two options.
Either you can reduce the number of home loan
installments or keep the number of installments
same but reduce the monthly mortgage payments
(EMIs).
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3. Impact on Leverage
This is an interesting topic and in order to
understand it let me take an example. John has an
investment opportunity which requires Rs. 1 lac
investment and it would provide him annually 15
return. His annual return in this case is Rs.
15,000.
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4. Debt Equity Ratio This is one of the classic
financial ratios and perhaps one of the first
ratios looked into by analysts to identify how
risky a financial decision is and hence
determining the respective financing cost
(interest rate). It works opposite to the
Leverage example above. While leveraging mentions
that the more your loan is, the better would be
your net returns.
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5. Use Mortgage as an Overdraft Account
This is one of the least used options available
in the market. Outside India, the product is
generally called as an Offset mortgage. In India,
the product is sold by State Bank of India by the
name Max Gain. In this type of mortgage account,
if you have surplus funds, you can deposit the
funds in your bank / mortgage account and
interest shall be computed on the balance
mortgage loan.
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6. Create Investment Vehicle to Prepay Should
you still want to prepay, instead of paying your
loan off, put the prepayment amount in an
investment vehicle such as a Mutual Fund SIP. Our
blog post Should I Prepay my Loan Or Invest Till
End of Tenure explains this in detail.
Source
http//insight.banyanfa.com/home-loan-prepayment/
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