Twin benefits: Save and prepay home loan

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Usually, a home loan is one of the biggest liabilities. Considering the huge amount and the long tenure involved, it is advisable to repay the loan at the earliest. And, as both the Reserve Bank of India and the National Housing Bank have abolished the penalty on prepayment of home loans (for floating rate loans), it is sensible to prepay your home loan and save on interest.

For those lacking the financial discipline to save and build a corpus to prepay a loan, some banks offer a product through which one can deposit small surplus amounts into a current account. This can be offset against the due amount on the loan; this would reduce your loan tenure, as well as the interest. You could also link the loan to your salary account and withdraw only the amount required for essential expenses. This would ensure a substantial balance in the account, which could be offset against the due amount on the loan.

Consider a scenario in which one has availed of a home loan of Rs 20 lakh and is paying an equated monthly installment (EMI) of Rs 22,000. Of this, Rs 2,000 goes towards the repayment of principal, and Rs 20,000 towards repayment of interest. If you deposit Rs 10 lakh in the account linked to the home loan, the repayment on Property Loan Interest Rate falls to Rs 10,000. As the monthly EMI remains Rs 22,000, the additional Rs 10,000 goes towards principal allocation, which could effectively reduce the interest on the entire sum, as well as the tenure of the loan.

Compared to prepayment, this is advantageous. In the case of prepayment, banks might insist at least a certain amount be paid, say an EMI or three EMIs or, in some cases, a figure of Rs 1 lakh. But in the case of an offset balance home loan, there are no such requirements - you could deposit any amount in the account, says Vipul Patel of Home Loan Advisors, an independent mortgage advisory firm.