When you pay your home loan before the end of the tenure, it is called foreclosing the loan. Foreclosing helps reduce the interest outgo and thus your total cost of borrowing.
However, foreclosing the loan is not always a merry ride. There are some aspects that you should know about foreclosing.
Here are a few things that you must consider before foreclosing your home loan.
- Forgoing tax benefits
You can claim tax deductions from your income for the amount paid on principal under section 80C up to Rs 1.5 lakhs. Tax deduction is also available on the interest repayment under section 24(b) of the Income Tax Act,1961 of up to Rs 2 lakhs. However, you must be ready to let go of them when you foreclose the loan. Therefore, you could compare the total interest outgo with the tax benefit amount to decide if foreclosing is a good idea.
- Financial net
To foreclose the home loan, you might have to pay off a substantial amount from your savings that can jeopardise your financial plans. Before you plan to foreclose your home loan, ensure to prepare a financial net to take care of the other goals and needs. For example, you must have an emergency fund, medical insurance, etc., to prepare yourself for needs like medical emergencies, children’s education, loss of job, etc. Your decision of foreclosing the loan should not lead to a financial crisis for you in future.
- Loan repayment priority
You might want to pay off your home loan at the earliest. However, if you have multiple debts like a personal loan, car loans, credit card bills, etc., you must prioritise the repayment carefully. It would be a better idea to pay off loans with a high interest rate like a personal loan first.
- Cost of foreclosing
Before foreclosing the loan, you must carefully consider the total costs. If you have a fixed interest home loan, you might have to pay prepayment charges. Depending on the lender, you might have to incur operating costs for foreclosing too.
- Cost-benefit analysis with investment returns
If you have investments, you must also weigh your return on savings with the home loan interest payments. Compare your post-tax earnings on investment versus the costs of foreclosing the housing loan. If you can earn more by being invested, it might not be a good idea to foreclose the loan. Also, consider the period of foreclosure. As the home loan interest rates are high during the beginning of the home loan, it could be a better idea to foreclose the loan in the initial years of the home loan tenure.
To foreclose the loan, you might have to pay off a substantial amount from your savings that can jeopardise your plans.
Once you foreclose the loan, ensure that you follow it with the loan closure steps. Take the NOC documents from the lender and get the lien removed from your property. Also, you must take back all the original documents from the lender, including your property documents. Moreover, do not forget to update your credit report and ensure that the loan prepayment has been intimated to the credit bureau.