Things to consider before prepaying your home loan

The interest rates in India are rising, if the two consecutive repo rate hikes of 25 basis points (bps) each by the Reserve Bank of India (RBI) in the preceding two quarters are any indication. There is a likelihood of another rate hike of 25 bps in the next policy review meeting of the RBI. While the depositors are rejoicing the rate hikes as these will fetch them higher rate of interest on their bank deposits, the borrowers are sulking as every rate hike will lead to a rise in their loan repayment instalments. So, every rate hike by the RBI will see an increase in retail deposits, while there could be a decrease in borrowings as borrowers try to save on their interest outgo by reducing the outstanding loan amount through prepayment of their loan amount in part or in full.

If you are one among the home loan borrowers who are thinking of prepaying home loans, then you need to take into account some basic things before you take the step.

You need to first decide whether you wish to make full or partial prepayment of the outstanding loan amount. If you have accumulated sufficient funds over the years to make partial or full prepayment, you can prepay the loan amount in full or in part, depending on the amount of outstanding loan and the liquid cash at your disposal. A full prepayment will save you the entire interest outgo on the balance loan amount, while partial prepayment will help you save interest on the prepaid loan amount. The interest saved could be substantial if the remaining tenure of the loan is long enough or the outstanding loan amount is high.

In the case of partial prepayment, you can either go for reduction in the tenure of the loan and keep the EMI same, or you can keep the same tenure and reduce the EMI. Both these options will save interest outgo, but the first option will result in more savings. The choice between the two options will depend on your income level, financial liabilities and liquidity needs.