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The pains of pre-payment
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Home loan may be taxing but pre-closure could also be the same, says SRIKALA BHASHYAM
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Money matters: Think carefully about the housing loan option
Most of us end up looking at property as an investment option due to various reasons. While the prospects of earning good returns is a driving force, the tax sops has been another motivator in recent times. As a result, families with double incomes have often looked beyond a single property. The congenial interest rate atmosphere did its bit as home loans with an annual interest rate of 8-9 per cent didn’t pinch the Indian middle class or the high net worth individua
ls.
However, the sharp rise in interest rates in the last 12 months coupled with the slow-down in appreciation in property prices have made many take a fresh look at their home loan commitment. It is not completely misplaced as every fresh hike in home loan rate, even by a 0.25 percentage, adds to the EMI. As a result, many borrowers have been forced to readjust their home loan commitments.
Pre-closure
For those who have access to corpus, repayment or pre-closure of home loan becomes the first choice as these borrowers tend to believe that they are better off without a higher EMI. Pre-closure has its own advantages and disadvantages. While the biggest advantage is that there would not be any pressure on monthly liquidity, the disadvantage is that a borrower will have to bear the cost of penalty. With penalty charges for pre-closure being 2-3 per cent, the burden could be as high as Rs. 40,000-60,000 on a loan amount of Rs. 20 lakh. With this being collected at one go, it tends to dissuade many borrowers from foreclosing their loans. The other burden could be lack of tax benefit which means a borrower will not enjoy a tax-free income of Rs 1.5 lakh (interest component of home loan).
The problem of penalty on pre-closure of home loan can be avoided by resorting to partial payment of principal amount. Luckily, banks or financial institutions don’t charge a penalty when you pay up part of the loan amount. However, while looking at paying up lump sum towards the home loan principal, keep in mind a few factors.
The partial payment should help you to reduce your EMI by at least a few thousands of rupees. When you resort to partial repayments at regular intervals — say once in three years —the loan tenure can come down drastically in the long term.
On the other hand, if you are looking at repaying the principal amount with your annual bonuses or incentives which could be in the region of Rs. 50,000-1 lakh, continuing with the loan may be a better option.
Instead, use the extra cash to invest in high yielding return products such as stocks or equity funds as they can help you earn better over a period of three years.
This will also help you to pre-pay a larger sum of the principal amount after a period of three years and bring relief in the EMI commitment.
While the burden of home loan may be daunting in the early stage of the loan period, it gets less painful over the mid term.
However, don’t forget the fact that the high EMI also allows you to enjoy the tax benefit in the early part of the property purchase as the interest component will be higher.
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Property Plus
Bangalore
Chennai
Hyderabad
Kochi
Thiruvananthapuram
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