Surbhi Gupta

Ravish and Sunita Thakkar took a home loan worth Rs 32 lakh for their apartment. They are paying a monthly installment of over Rs 42,000 and would continue to do this for the next 10 years. With Ravish getting a new job, the Thakkar’s got some extra money in their hands. They decided to prepay the loan amount at the earliest and put their extra money to the best use.

Is this the best option for them? Do they need to pay prepayment penalty? Here are all the answers: (Refer picture)

Experts says that prepaying is a wise option if the loan has been taken under floating rate as there is no penalty to be levied as directed by RBI and National Housing Bank. However, if the there is fixed rate of interest, one might need to pay a certain percentage to the bank.

“Whenever you want to repay the home loan before completion of your tenure, the lenders normally charge a prepayment penalty on the amount of loan outstanding. Though percentage of penalty varies from lender to lender but is usually around 2%. However some of the lenders do not charge any prepayment penalty,” says Balwant Jain, CFO, Apna Paisa.

Another point that financial experts made was about using up the liquid cash. Harikrishan Dubey, one of the financial advisors in Mumbai says, “One needs to retain the liquidity to meet emergency financial requirements. So, it is wise to take decision rationally – whether or not or how much to pay as home loans is comparatively cheaper than personal and gold loans.”

Tax benefits at a bay

As the interest component of the housing loan offers tax benefit, the decision whether to go or not for prepayment is also further decided by the tax benefit an individual is availing. “In case, the property is self-occupied any repayment of loan which does not bring down the interest component below Rs 1,50,000 will not have any tax implication as far as tax benefits in respect to interest component is concerned,” says Dubey.

While, it’s always wise to pay off the loans at first hand but it is wiser to consider other investment avenues which can be more fruitful in every possible way. Here are some of the other options-

-Tax-free bonds issued by Public Sector Undertaking (PSU)

-Bonds issued by Non-Banking Financial Companies (NBFCs)