Every working professional hopes to buy their ideal home early in their career. It also has several benefits. You have a solid 30 years until retirement to repay your home loan if you purchase a home in your late 20s or early 30s. In most cases, these home loans are loans against property in India. A few tax advantages apply to home loans as well. While the interest paid on your loan qualifies for a tax deduction under Section 24, the principal that you refund qualifies for a tax deduction under Section 80C.
Banks have recently increased the loan payback terms for home loans to 30–40 years to attract clients, but borrowers are cautious about paying interest far higher than the loan’s original cost.
Thus, many people are forced to choose between foreclosing on their home loan and paying less interest to the bank or tax to the government.
Why Do Some People Think About Loan Foreclosure?
In the past, foreclosure fees were substantial, amounting to 5% or more of the unpaid principal. It had a significant practical impact on those who wished to foreclose on their loan against property. Banks are no longer permitted to charge foreclosure costs to borrowers with a home loan with a variable interest rate, according to a 2012 RBI guideline.It might encourage borrowers to foreclose on their loan against property, but they should pause and think before doing so for the reasons we shall cover in a while.
Banks will continue to charge around 4% on the outstanding principal for people with a home loan with a fixed interest rate. A home loan, also considered a loan against property in India, might be a continual source of worry for many people, particularly considering that it has a significantly more extended payback period than the majority of other loans. Therefore, they want to close the loan as soon as possible to avoid debt, even though they are comfortable paying the EMIs.
What Must You Consider Before Foreclosing On A Mortgage?
Consider the following four factors before choosing if you’re considering foreclosing on a home loan after a sudden inflow of large sums of money or the sale of an asset:
○ Tax Savings vs Interest Expenses Comparison:
Your home loan qualifies for several tax advantages, as was already discussed. You will have to renounce any tax deductions your loan could be entitled to if you want to foreclose on it. Calculate a comparison between your interest expenses and tax savings to see if your interest expenses are more than your tax savings. You need to think about foreclosing on the loan in such a scenario.
○ Check To See If Your EMIs Leave You With Enough Savings:
In addition to helping you with ongoing expenditures, your monthly payment also enables you to start saving money for the future. You may want to think about foreclosing the loan as soon as you get a profit if your home loan EMIs are taking excessive earnings and hardly providing you enough for investments and savings. You save significantly each month when you make EMI payments much less than your paying capabilities.
○ Take Ownership Of Your Other Essential Commitments:
In addition to your home loan foreclosure, you may have several other, more pressing short- and long-term financial obligations, such as those related to your child’s education, your marriage, your emergency fund, any money put aside for unexpected medical expenses, etc.
○ Check To See If Investing The Extra Money Is More Beneficial
Instead of spending these extra funds to foreclose on your loan, you may opt to invest them. If you’ve been considering this, you should compare your expected investment returns with the interest you will pay on your mortgage over the same period to determine which option is most profitable. Only choose foreclosure if your interest expenses exceed your investment earnings. If you’re close to retiring but still have a significant amount of loan payments, you may choose to utilise the extra money to foreclose on your loan.
Foreclosing on a variable interest rate with a home loan may appear appealing now that the foreclosure fees have been removed. But bear in mind to give the factors mentioned above significant thought before choosing an appropriate option about how to use your discretionary income effectively.If you are ready to obtain a home loan apply online and ensure that you adhere to the above mentioned factors.