Prepaying Home Loans? STOP! RETHINK!!

Bothered about upcoming RBI rate hikes and planning to prepay your home loan?

 

RETHINK!! As, Home loan EMIs come with tax breaks, and you could, in fact, save some money by keeping a home loan alive.

 

If a borrower has no defined financial goal and has surplus liquidity then, paying the loan or a part of it is a clever move. “For people who do not have the surplus liquidity, they need to ensure that they keep their tenure intact by increasing their EMIs, rather than allowing the tenure to go up, and therefore ending up paying more interest,” an experienced Wealth Advisor said.

Section 24(b) of the Income tax Act,1961 allows a person to avail a deduction of Rs. 2 lakhs from your taxable income for the interest you pay on your home loan. The idea is to smartly keep the loan amount at a number that gives you an interest cost of Rs.2 lakhs a year to avail the maximum benefit of Section 24(b).

For example, if your home loan rate is 9% and the remaining tenure is 10 years, then a home loan amount of Rs. 23 lakhs will give an interest cost of Rs. 2 lakhs. At 9.50%, the optimal loan amount is Rs. 21.75 lakh. The higher the interest rate, the less loan you should keep and vice versa.

As interest rates are rising, the amount of loan to keep should reduce.

Suppose your investment in mutual fund is giving you an annual return of 9%, then it makes sense to keep the money in the fund and pay an interest of 6.2%, rather than seize the investment and prepay your loan. You can prepay the amount in excess of your ideal home loan amount.

 

Most home loan products are already exorbitant post the previous rate. But remember to avoid sprinting in to prepay.



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