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Investing is beneficial instead of repaying home loan prematurely: Interest on secured loan is less, whereas you can get higher returns on investment.

You have some extra money and want to foreclose or pre-pay the home loan. But, before making pre-payment it would be better to consider all the aspects related to it.

It is possible that by investing that amount you may get more benefits than the benefits received from pre-payment. Keep in mind that most financial institutions charge the maximum amount of interest in the initial years of the loan. In such a situation, pre-payment or foreclosure much later will not be of much benefit.

Home Loan Pre-Payment Charge Most of the financial institutions providing home loans charge pre-payment charges. Currently, there is no penalty for partial or complete prepayment for a floating-rate home loan. However, banks charge foreclosure charges for fixed rate home loans. This charge may vary from bank to bank.

According to the rules, if you are making pre-payment from your own funds, then financial institutions cannot impose penalty. This penalty can be imposed only if you refinance the home loan from any other institution.

How are pre-payment charges imposed?

  • Percentage of Principal: Most financial institutions charge a fixed percentage (between 1% and 3%) of the outstanding principal amount.
  • fixed fee: Some financial institutions may set fixed fees. For example, if pre-payment is Rs 50,000 in the first year, it will be charged less in subsequent years.
  • Interest for few months: In some cases, the bank or finance company may charge the remaining few months of interest as penalty on pre-payment.
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Consider these aspects also

  • Financial Goals: Before pre-paying a home loan, consider whether you may need a large lump sum sum in the near future. In such a situation, the amount fixed for pre-payment can be reserved for other financial needs.
  • Investment Opportunities: Generally the interest on home loan is low. In such a situation, instead of pre-paying the home loan, if you invest that amount in an instrument with higher returns, then you may get more profit.

Graphics Source: VaskarAssets

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