Home Loan Interest Rates Likely To Go Up, Does Prepayment Make Sense?

As banks are likely to pass on the impact of a rate hike to customers, the equated monthly instalments (EMIs) on your home loan will also see an increase. In such a scenario, does it make sense to prepay your home loan? Read on to find more
SBI Home loans
SBI Home loans

The home loan interest rates have been steadily rising since May 2022, when the Reserve Bank of India (RBI) began increasing the repo rate. Since then, the RBI has raised the repo rate six times. 

With the latest hike of 25 basis points on February 8, 2023, home loan rates are expected to go up even further to 9.25 per cent.

In such a situation, a borrower can either increase the equated monthly instalments (EMIs) on his/her home loan, increase the tenure, or prepay the loan.

There are several benefits of prepayment, though. 

Says Atul Monga, founder and CEO, Basic Home Loan: “It reduces the overall tenure, which means lower interest payments and also an early loan closure, which means financial freedom.” 

When Prepayment Makes Sense: When you repay a home loan, the interest component forms a major part of your EMIs in the first few years. In such a scenario, making a prepayment in the first few years of your home loan makes sense. 

Says Anant Ladha, founder, Invest Aaj For Kal, a financial advisory firm: “If you have taken a home loan in the last two years, and that too, at the floating rate, then due to an increase in interest rates, your tenure would have increased by more than seven years. In such a scenario, it makes sense to prepay the loan, especially if you have money lying in fixed deposit, as the prepayment would outweigh the returns from the FD.” 

FD rates are currently at 7-8 per cent or even lesser. In such a scenario, it makes better sense to use the money lying in FDs to prepay your home loan, which comes at a higher rate of interest. 

Agrees Adhil Shetty, CEO, of Bankbazaar.com, a financial services website: “The only way to control the rising costs of borrowing is to make prepayments. Do not rush into breaking your investments and making prepayments. Instead, plan toward it. You can do it in different ways depending on what suits your financial situation best.” 

Mathematically, a 20-year loan can be repaid in 12 years if you prepay five per cent of the loan balance once a year. Else, you could pay an additional 5-10 per cent over your existing EMI every month. Or, you could pay an additional 2-5 EMIs every year, or an additional EMI every quarter. Any and all of this would bring down your loan burden.

Things To Keep In Mind: All said and done, it is important to take note of all the charges when you prepay your home loan. Banks cannot charge a prepayment penalty in the case of floating rate home loan. However, fixed-rate loans can charge a prepayment penalty of 2-4 per cent. 

So, before you decide to prepay the home loan, check if the benefits outweigh the costs.

Related Stories

No stories found.
Outlook Business & Money