Buying a home is a major decision in one’s life, and many are likely to depend upon financial assistance to fulfil their dream. This dream of owning a home can be fulfilled by availing of a home loan. Availing a home loan is a prudent way as it provides one with the required opportunity to mitigate one’s greatest dream of having a house without burdening much on finances. Likewise, as buying a home is a major decision, choosing the prepayment route is also a major decision, which needs in-depth research. Note that at the time of buying the Federal Bank Home Loan or home loan through another lender, ensure not just to check the Federal bank home interest rate or other lender’s rate but also the offered prepayment charges in case you are opting for a fixed interest home loan.
Like a home loan, whether it is a Federal bank home loan or home loan provided by other home loan lenders is a long term financial decision that extends more than a decade, it is recommended to part prepay the loan with surpluses as and when you avail it irrespective of the existing interest rate regime. Holding massive surpluses in hand and waiting to witness interest rate regime change before opting for the prepayment option would only enhance your opportunity cost, which means losing opportunity on interest cost savings due to delayed prepayment. However, before moving ahead with the part prepayment decision, make sure to consider five important factors to avail optimum value out of it.
Consider your liquidity when choosing between home loan EMI and tenure reduction options.
Home loan borrowers are often given two options when choosing the part prepayment option for their Federal bank home loan or for a home loan with other banks or HFCs. They either can reduce their EMIs or reduce their loan repayment tenure. Though the latter option may result in enhanced savings in the interest payout, the basic decision to choose between the 2 should be based upon your disposable income. For example, consider you took a Federal bank home loan of Rs 50 lakh at 7 % p.a. about five years back, having a loan tenure of twenty-five years with your present outstanding being Rs 45.58 lakh. In case you make a prepayment in a lump sum of Rs 6.30 lakh towards the end of the fifth year and choose a loan repayment tenure reduction option, you would save nearly Rs 15 lakh of your interest amount and your loan tenure would come down by 5 years. However, in case you continue with the same home loan tenure, your EMI would drop to Rs 30,454 from Rs 35,261. This would overall save an interest amount of Rs 11.53 lakh. Thus, though choosing the tenure reduction option results in more interest cost savings, one can select EMI reduction just in case of an increasing interest rate regime if this event can affect your disposable income.
Compared with the savings generated via the loan transfer option.
Though prepayment of your home loans like a Federal bank home loan or a Home Loan for other lenders can lower your interest cost, choosing this option by redeeming your present investments can impact your financial health for the long run. In the situation you select the option of a home loan balance transfer, your existing home loan is taken by another lender at a lower interest rate. Doing so lowers your overall interest payout without hampering your investments as well as liquidity. If you consider the above given example, if you take the decision of transferring your Federal home loan to another lender, say at an interest rate of 6.5 % p.a for the remaining tenure of twenty years, you still will manage to save about Rs 3.25 lakh of interest amount without compromising on your existing liquidity or investments. Ensure to compare all the savings that you get through Federal home loan prepayment or other home loan prepayment through home loan balance transfer and then make your final decision as per your financial goals as well as liquidity.
Do not touch your exigency fund.
The contingency fund is majorly maintained to witness financial exigencies or to meet mandatory expenses in the course of unemployment conditions or due to loss of income because of disability. Your fund size must be sufficient enough to mitigate your mandatory expenditures of nearly six months. If you utilize your contingency fund for making your home loan prepayment towards a Federal home loan or other home loan lender, any unforeseen situation may force you to opt for an expensive loan or redeem your investments at a loss. Thus, avoid factoring in your contingency fund for prepayment purposes.
Do not redeem investments especially created to achieve financial goals.
Financial goals are the monetary expression in reference to your life goals. Some of the examples of your crucial financial goals are a generation of corpus for your child’s marriage, post-retirement life, arrangement of a down payment for your car loan or home loan. Redeeming your investments particularly aimed to attain such life goals may propel you to avail expensive loans later on the maturity of such life goals. Thus, choose the home loan prepayment option only if you have sufficient surpluses after you have factored in your contingency fund and month on month contributions set aside to meet your financial goals.
Factor in the returns that you avail from your existing investments
Though Federal Bank Home Loan Interest Rates or interest rates of other lenders are the lowest among the prevailing lending products, their interest rates are usually higher when compared with most product interest rates. Thus, in case you get any surplus fund parked in your fixed-income investments like fixed deposits, debt funds etc., that are not designed for attaining any financial goals, then it can be used for making prepayment of your Federal bank home loan or home loan with other bank or NBFC lenders.