Hi I am 36 years old recently bought a flat , my loan emi is for 10 years.(40 lac loan). Would like to know that if I close the loan after 6 to 7 years will it be beneficial as I know that banker usually debit higher interest inthe beginning nd leaves tiny amount in last stage of loan closure

Ans: Congratulations on your recent flat purchase. It’s excellent that you’re considering the benefits of closing your home loan early. Let’s explore the advantages and potential downsides of prepaying your loan after 6 to 7 years in a detailed and systematic manner.

Understanding Your Home Loan Structure
To begin with, let’s review the typical structure of home loans, especially focusing on the interest component.

Home Loan Amortization
Amortization Schedule: Home loans are structured on an amortization schedule, where each EMI (Equated Monthly Installment) has a combination of principal repayment and interest payment.
Front-Loaded Interest: In the initial years, a significant portion of the EMI goes towards interest repayment, while a smaller portion repays the principal.
Declining Interest: Over time, as the principal reduces, the interest component decreases, and the principal component increases.
Understanding this structure helps in realizing why prepaying the loan in the early years can save you more on interest costs.

Benefits of Prepaying Your Home Loan
Prepaying your home loan after 6 to 7 years can have multiple advantages. Let’s delve into these benefits.

Interest Savings
Higher Interest Payment Initially: Since interest payments are front-loaded, paying off the loan early can save a substantial amount in interest.
Interest Savings Calculation: By prepaying after 6 to 7 years, you cut down on the total interest payable over the loan’s tenure.
Reduced Financial Burden
Debt-Free Sooner: Closing your loan early means you can become debt-free sooner, reducing financial stress.
Improved Cash Flow: Without the EMI obligation, your monthly cash flow improves significantly, allowing for better financial flexibility.
Increased Savings and Investments
Reallocation of Funds: The funds saved from EMIs can be redirected towards savings or higher-yielding investments.
Compound Growth: Investing the money that would otherwise go into EMIs can compound over time, potentially leading to greater wealth accumulation.
Enhanced Credit Score
Positive Impact on Credit Score: Repaying your loan early can positively impact your credit score, reflecting well on your creditworthiness.
Better Loan Terms: A higher credit score can help you secure better terms on future loans, if needed.
Considerations Before Prepaying Your Home Loan
While prepaying your loan has clear benefits, there are also some considerations you need to keep in mind.

Prepayment Penalties
Prepayment Charges: Some banks levy prepayment penalties, especially for fixed-rate loans. It’s essential to check your loan agreement for any such charges.
Negotiating with the Bank: You can sometimes negotiate these charges or look for banks that do not charge prepayment penalties.
Opportunity Cost
Investment Returns vs. Loan Interest: Evaluate if the returns from potential investments exceed the interest savings from prepaying your loan.
Market Conditions: In a bull market, the returns from equity investments might surpass the benefits of loan prepayment.
Strategies for Effective Loan Prepayment
If you decide to prepay your loan, implementing an effective strategy can maximize your benefits.

Regular Part-Payments
Monthly or Quarterly Part-Payments: Make regular part-payments in addition to your EMIs. Even small additional payments can significantly reduce the loan tenure and interest burden.
Bonus and Windfalls: Use annual bonuses, tax refunds, or other windfall gains to make lump-sum prepayments.
Increasing EMI Amount
EMI Increase Option: If your bank allows, increase your EMI amount whenever your income increases. This approach can reduce your principal faster.
Annual EMI Review: Review and revise your EMI annually based on your financial situation.
Refinance or Balance Transfer
Lower Interest Rate: Consider refinancing or transferring your loan to another bank offering a lower interest rate.
Cost-Benefit Analysis: Ensure that the savings from a lower interest rate outweigh the costs involved in refinancing.
Long-Term Financial Planning Post Loan Prepayment
Post loan prepayment, it’s crucial to have a solid financial plan to ensure that your finances remain robust.

Building an Emergency Fund
Adequate Emergency Corpus: Build and maintain an emergency fund to cover 6-12 months of expenses to protect against unforeseen financial challenges.
Liquid Investments: Keep the emergency fund in liquid investments like savings accounts or liquid mutual funds for easy accessibility.
Increasing Retirement Savings
Boosting Retirement Contributions: Redirect the funds saved from EMIs towards retirement savings to ensure a comfortable and secure retirement.
Diversified Portfolio: Invest in a diversified portfolio of equities, bonds, and other instruments to balance growth and risk.
Investing for Future Goals
Child’s Education, Marriage, and Other Goals: Allocate funds towards long-term goals like children’s education, marriage, or other significant life events.
Goal-Based Investing: Follow a goal-based investment approach, aligning investments with the timeline and risk appetite for each goal.
Utilizing Tax Benefits Wisely
While prepaying your loan, it’s also important to consider the impact on your tax benefits.

Home Loan Tax Benefits
Section 80C: Principal repayment of up to Rs 1.5 lakh per year is deductible under Section 80C of the Income Tax Act.
Section 24(b): Interest paid on home loan up to Rs 2 lakh per year is deductible under Section 24(b) for self-occupied properties.
Post Prepayment Tax Planning
Alternative Tax-Saving Investments: Post prepayment, explore other tax-saving investments under Section 80C like PPF, ELSS, or life insurance premiums.
Health Insurance: Avail tax benefits on health insurance premiums under Section 80D.
Final Insights
Closing your home loan early, especially after 6 to 7 years, can be highly beneficial. You’ll save on interest payments, reduce your financial burden, and improve your cash flow. However, consider prepayment penalties and opportunity costs. Implement strategies like regular part-payments and increasing EMI amounts to make prepayment effective. Post-loan, focus on building an emergency fund, increasing retirement savings, and investing for future goals. Utilize tax benefits wisely and ensure that your long-term financial plan remains robust.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in