Effective ways to repay and pre-close your mortgage

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The pre-closing of a mortgage means the closing of the loan before the end of its effective mandate.

Home loans can be granted for terms of up to 30 years. Often, borrowers prefer the longest term possible based on their eligibility. This minimizes the EMI pressure on them and makes it easier for them to manage their finances. However, the longer the term of your loan, the higher the interest on your loan. Therefore, as your income grows, you may want to consider ways to speed up your loan repayments to get out of debt faster. There are several ways to write off your debt. Pre-payment and pre-closing of your loan are two of them.

Pre-closing a loan means paying your contributions in one installment. Prepayment means making partial payments on your loan in addition to your IMEs. This saves you interest that you no longer need to pay with IMEs. As a result, your income and savings can be diverted towards other financial goals, such as your children’s education. Pre-closing a home loan can be beneficial for you, as long as it is done the right way.

So let’s see how to optimize your prepayments and pre-closing.

What is pre-closure?

The pre-closing of a mortgage means the closing of the loan before the end of its effective mandate. For example, the term of your home loan is 25 years. After paying the IMEs for 15 years, your outstanding loan is Rs 10 lakh, and you decide to write the lender a check for that amount to settle the dues in one fell swoop. Thus, your loan is pre-closed, that is to say repaid 10 years before its maturity. You have no debt and you can immediately get your property documents back from the lender.

What is prepayment?

Prepayment is also a way to gradually pre-close your loan. For example, your EMI is Rs 50,000, but you decide to pay Rs 2 lakh each month. The amount in excess of the principal and interest due for that particular month is treated as a prepayment. So if your principal and interest that month were Rs 17,000 and Rs 33,000 respectively, paying an additional Rs 1.5 lakh for the month makes your total principal payment for the month Rs 1.67 lakh. Regular prepayment will speed up your loan repayment, helping you pre-close.

As per the RBI guideline, banks currently do not charge any pre-closing or prepayment fees on variable rate home loans. However, lenders can charge simple interest charges.

Refinancing for pre-closing of the mortgage

Outstanding home loans that were taken out a few years ago may attract a higher interest rate than currently disbursed home loans. If there is a substantial difference between the market rates and the rate on your current loan, you can refinance it. You can contact your own lender to negotiate a lower rate or transfer your loan to another lender with better terms. A loan balance transfer involves taking the new loan to repay and pre-close the old loan.

For example, your current home loan is Rs 50 lakh. The remaining term is 20 years. Your current bank charges you 8.5% interest. You have seen that some lenders offer 6.8% home loans while charging processing and other fees of Rs 20,000. What should your decision be? Should You Refinance Your Home Loan Or Stick With Your Existing Lender? Let’s check.

Thus, by refinancing a home loan, you will be able to save interest of around Rs 12.54 lakh in 20 years. Suppose you continued to pay off the same IME after the refinance that you paid back to your previous bank, you would be able to pre-close your loan in 187 months instead of 240. Before transferring the home loan, check the processing fee and other charges levied by the bank for such a facility.

Use the deals to partially repay the loan

From time to time, you may get additional income through bonuses, profits, ESOP payments, inheritance, or other unexpected means. Instead of spending that income unexpectedly, use it to prepay your home loan. Even if you pay off your loan a little, it can save you a lot of interest, leading to pre-closing. For example, you have a loan balance of Rs 50 lakh with 20 years remaining and an interest rate of 6.8%. Your total interest on these numbers would be Rs 41.60 lakh. However, if you pay in advance only Rs 5 lakh, your total interest payment would amount to Rs 29.58 lakh, saving Rs 12.02 lakh.

Set a financial goal for loans

You can plan to prepay or pre-close your mortgage by saving money for this. You can use your excess monthly income to invest in instruments like R&D or mutual funds or a combination of the two to build up a body of work that can be used to pay off your loan. You need to choose an investment vehicle carefully and focus on earning more than the prevailing interest rate on your home loan.

Strengthen your NDEs

You can use the excess monthly income to increase your IME. The amount you pay on top of your contributions will be treated as principal payments, which will also serve as prepayment and help you pay off your loan sooner. You should increase your IME periodically according to the increase in your income. For example, if your starting NDE was Rs 25,000 while your take home pay was Rs 60,000, you can increase your NDE to Rs 50,000 if your take home pay is now Rs 120,000. this is an illustration, and you need to calculate the step-up based on your financial situation.

Before pre-closing your home loan, you need to assess whether or not it is financially suitable for you. The home loan is one of the cheapest loan products available on the market, and before you cut down on your cash flow to pay it off, you should also carefully consider its impact on your tax liability. Getting out of debt is a great place. Use low interest rates, financial planning, and regular advance payments to your advantage.

(The author is CEO, BankBazaar.com)

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