A Guide to Prepayment of Home Loan Calculator

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Every individual buys a home suiting their financial situation. But over time, as the income increases, homebuyers often face the dilemma of whether to prepay the home loan or invest in a mutual fund. If you are considering prepayment for your new flat in Kolkata, it’s a good option to use a prepayment of home loan calculator. A home loan is usually one of the biggest loans in an individual’s lifetime, and since there is no prepayment penalty, it is obvious that home buyers want to get rid of it as soon as possible and become debt-free. 

A Guide: Prepayment of home loan calculator

Let’s study some situations when it is a good idea to use a prepayment of home loan calculator. 

Should you prepay your home-loan and by how much?

Deciding whether to make prepayment or invest the money is not that easy with home loans. There are several factors involved that need your attention, the interest rate on loan, remaining tenure, return rate from the investment, tax benefit forgone on the interest and principal repayment, among others.

Firstly, calculate the opportunity cost i.e. the benefit forgone for not investing the same amount that you are planning to prepay. 

If the opportunity cost is lower than the money saved through interest, it is a good decision to make prepayment of home loan. For instance, if you have taken a home loan of ₹50 lakh with a tenure of 20 years at an interest rate of 7.5%, and if you make a partial prepayment of ₹5 lakh at the end of the fifth year, then you will save interest of ₹8.8 lakh over the tenure of the loan. At the same time, investing in a fixed deposit, which is currently giving an interest rate of around 5.4%, will earn you ₹6 lakh at the end of 15 years. So, if one calculates the post-tax return on FDs, the gains would go down further.

If you are planning to prepay your loan, use a prepayment of home loan calculator to calculate your monthly EMI. Generally, it is advisable that EMIs shouldn’t exceed beyond 30-40% of the monthly in-hand income, as this leads to higher credit utilization.

When is it advisable to make prepayment on home loan?

There are certain situations when it is advised to make prepayment rather than investing. With high-ticket loans like home loans, you can save taxes both on account of interest and principal repayment amount. Therefore, by continuing a loan, you may save substantial tax, especially in the higher income tax bracket. However, there are limitations, the tax benefit cannot exceed Rs 2 lakh of interest payment in a given financial year. So, if you are paying a much higher interest amount especially with a loan amount of Rs 30 lakh and above, you would not get any tax benefit on the additional interest amount.

In such a case, it is advisable to make partial prepayments to reduce the outstanding, so that you can make the most of your tax benefits. 

In other words, with high ticket loans like a home loan, if you consistently make part prepayment during a low-interest period you can benefit by saving a substantial amount. 

When is it not advisable to make prepayment on home loan?

In situations, when the home loan amount is lesser and if you prefer tax-saving, then it is not a favorable option to make a prepayment. 

In a scenario where both the spouses are entitled to tax benefits separately, the loan amount in such cases is greater. If the loan is taken jointly with a co-applicant, and when both share the EMI burden then the interest deduction benefit can be claimed by both for an amount of Rs 2 lakh each. In such cases, there is no need to prepay, especially if the outstanding amount is less than Rs 40 lakh. Use a prepayment of home loan calculator to know where you stand with your expenses and to make better financial decisions. 

Lastly, you should remember the main benefit of prepayment is to reduce the interest outflow. The interest component in the EMI is the greatest during the initial stage of the home loan. Therefore, you may not get the full benefit if you make a prepayment of loan in the mid-to-late stage. In such cases, it is wise to invest the surplus funds. Use a prepayment of home loan calculator to calculate your monthly EMIs. 

Is it a good idea to prepay during the COVID-19 pandemic?

Since a lot of people are losing their jobs during the pandemic, it will be a burden to pay EMIs, in case the earning family member loses a job or gets a pay cut, it is therefore wise to prepay a home loan to bring down credit utilization from higher EMIs, in such a situation.  

Furthermore, with the economic slowdown during the coronavirus pandemic, chances are interest rates won’t rise anytime soon. On the contrary, there can be a further rate cut. Additionally, the Reserve Bank of India (RBI) has approved a moratorium on various loans. The moratorium is especially beneficial for people going through a liquidity problem. 

What are the home-loan relief measures provided by the Government?

The Government and the Reserve Bank of India have introduced several relief measures to abate the economy from the ongoing Covid-19 crisis. Let’s look into the benefits and how you can avail them:

1. Loan Moratorium Extension

Introduced especially to ease the loan repayment obligation amid the lockdown and the economic slowdown, the RBI has further extended the moratorium period on all loan EMIs and credit card dues by another three months, i.e., till August 31, 2020. So, the total moratorium period is now six months.

2. Relaxation on ITR compliance

The government has provided relaxation to people on Income Tax Returns compliance. The last date to file the ITR has been extended to November 30, 2020, from July 31, 2020. The ITR date extension is likely to help several taxpayers whose salaries are delayed, and will also help individuals who face liquidity issues to pay the tax amount.

3. Reduction on TDS Rate and Percentage Contribution to EPF

The government has reduced the Tax Deducted at the Source rate by 25% for non-salaried taxpayers for March 31, 2021. It means that if you are a non-salaried person, you will get a little more income in hand. If you fall in a higher tax bracket, your tax payment will be reduced to the extent of your TDS payment. Therefore, if you are currently getting the relief of 25% in TDS deduction, you will have to pay tax from your pocket later.

4. PMAY Deadline Extension

The Credit Linked Subsidy Scheme under the Pradhan Mantri Awas Yojana provides an upfront interest subsidy on home loans applied by eligible first-time homebuyers. Based on the scheme, middle-class families with annual household income between Rs. 6 lakh and Rs 18 lakh will now get another year (i.e. till March 31, 2021) to avail an interest subsidy of up to Rs. 2.35 lakh on their approved home loans.

5. Repo Rate Reduction by the RBI

RBI’s decision to cut the repo rate on multiple occasions in the recent past has led to record-low home loan interest rates. If you’re already servicing a repo-linked home loan, you may have noticed that you already have lower EMIs. And if you have an MCLR-based loan, you’re also likely to experience reduction in loan EMIs soon.

6. PMVVY Date Extension

The government has also extended the investment period for the Pradhan Mantri Vaya Vandana Yojana (PMVVY) until March 31, 2023. PMVVY is an investment product meant for senior citizens (those above 60 years) who can get guaranteed pension payouts for 10 years where the maximum amount allowed for investment is Rs. 15 lakh.

In closing

Indians are conditioned to believe that debt is troublesome. Although it is good to reduce debt, being averse to debt is not always wise. With smart planning, one can comfortably manage debt. While availing home loan for your new flat in kolkata, make sure you consider your repayment capacity; prepayment in such cases may not be essential. However, if an outstanding loan worries you, then instead of prepayment, consider getting home loan insurance. This will also protect your dependents from repayment obligations in case of unfortunate accidents. Furthermore, in haste to prepay the home loan, do not compromise on liquidity. Ensure that you have sufficient funds available for your regular finances and emergency requirements. It is always advisable to use a prepayment of home loan calculator to keep track of your finances. 

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