Summary: Making prepayments on your home loan can lead to significant savings and financial benefits. By reducing the outstanding principal, you can save on interest, shorten the loan tenure, and potentially lower your monthly instalments.
Are you planning to buy your dream home but worried about the cost? The good news is that you can always take a home loan. However, it’s important to keep in mind that a home loan is a long-term commitment.
While repaying a home loan over its tenure is the norm, making prepayments can positively impact your financial situation.
Not to forget, it can also positively impact your credit score. So let’s delve deeper to learn more about home loan prepayments from a financial planning perspective and discuss how they can help you maximise your savings.
What Are Home Loan Prepayments?
Like any other loan, a home loan has an underlying obligation to repay the borrowed amount on time. Home loan prepayments refer to making additional payments towards your outstanding loan amount, over and above your monthly instalments.
You can make prepayments for your home loan anytime throughout the loan tenure. Also, the prepayment amount can be at your discretion.
How Do Home Loan Prepayments Benefit You?
There are numerous benefits of prepayment of home loans. Here are some of the most important ones.
Interest Savings
One of the most significant advantages of making home loan prepayments is the potential for substantial interest savings. By reducing the principal amount, you effectively reduce the interest charged on the loan.
Over time, this can translate into significant savings, making you debt-free sooner.
Shorter Loan Tenure
Another interesting benefit of home loan prepayment is that it enables you to shorten the loan tenure.
As you reduce the outstanding principal amount, the remaining instalments are recalculated, resulting in a shorter repayment period. This saves you money on interest and grants you the freedom of owning your home outright at an earlier date.
Lower Equated Monthly Instalments (EMI)
Home loan prepayments can also lead to a lower EMI. By reducing the outstanding principal, your lender can readjust your monthly instalments, making them more affordable.
This can improve your monthly cash flow and provide greater financial flexibility.
Improved Creditworthiness
Prepaying for a home loan can positively impact your credit score. Demonstrating the ability to make prepayments consistently reflects positively on your creditworthiness.
It showcases your financial discipline and responsibility, which can enhance your credit score. A good credit score opens doors to better loan terms and lower interest rates in the future.
Financial Planning And Home Loan Prepayment
Here’s how you can leverage the prepayment of a home loan for better financial planning.
Assess Your Financial Situation
Before making prepayments, assess your overall financial situation. You must consider factors such as your income stability, emergency fund, and other financial goals.
It’s important to ensure that making prepayments won’t jeopardise your financial stability or impede progress towards other objectives.
Calculate Potential Savings
You can either leverage online tools or consult a financial advisor to calculate the potential interest savings and reduction in loan tenure based on your prepayment amount. It will give you more clarity on your financial standing.
Compare Alternatives
The most important thing to do is to compare the alternatives available. Assess the returns on investment options available to you. You should consider the risk and potential returns before making a decision.
Make Strategic Prepayments
Rather than making sporadic prepayments, strategically plan your prepayment schedule.
Analyse your financial situation, align it with your goals, and determine the most suitable time and amount for making prepayments. This will ensure that you derive maximum benefit from your additional payments.
Conclusion
Home loan prepayments offer an effective way to maximise your savings and expedite your journey towards homeownership. By reducing the principal amount and saving on interest, you can achieve financial freedom earlier than anticipated.
However, it’s crucial to evaluate your financial situation, calculate potential savings, and consider alternatives to make the best decision. Choosing a reputed home loan provider can save you a lot of hassles with the home loan process.
