Should You Prepay Your Home Loan Now?

  Author: Naveen Kumar

The politicians are busy debating whether the government’s recent demonetization of Rs 500 and Rs 1,000 notes have benefitted the country. Well, one thing is for sure: home loan interest rates have come down. Major banks have announced cuts in home loan rates. While these announcements have been for new borrowers, what should existing home loan borrowers do?

Review your home loan Clearly, this is a great time for you to review your home loan situation and check if it makes sense for you to for the prepayment of your home loan. In case you have a floating rate home loan, chances are that your home loan rate would automatically get adjusted. They would get in sync with home loan interest rate reduction by your home loan providing institution for new home loans, by either reducing the base rate or MCLR (Marginal Cost of Funds based Lending Rate).

Request switch to the new rate If the home loan reduction is not forthcoming for you soon, we suggest you consult your home loan provider and request for a shift your home loan to new reduced rate. Of course, you may need to pay some fee for switching and subsequently you would get the advantage of the reduced home loan interest rate. Once the reduction in the interest rate for home loan happens, ensure that you keep paying the same EMI and don’t opt for its reduction. This will help you repay your loan sooner.

Consider home loan prepayment You can also consider making a home loan prepayment.  Remember, there is no penalty on prepayment of floating rate home loans. In case you have a fixed rate home loan, you would need to calculate your net benefit from a prepayment i.e. your gain after a prepayment penalty of 2-4% of the prepayment amount. There has been a reduction of about 2 percentage points in housing loan rates in the last 3 years. Since fixed rate housing loan comes with a premium in terms of housing loan interest rate, it is more likely you would gain from a prepayment even after the penalty.