Prepaying home loan now will be beneficial for these borrowers

The interest rate cycle is finally on its way up thanks to multi-year high global and domestic inflation. To control inflation, like many other central banks across the world, the Reserve Bank of India (RBI) raised the repo rate by twice in May and June by a total 0.9%. However, going by the global inflation trend, it seems it may take long for inflation to come down within 2%-6% – the comfort zone of RBI. Home loan borrowers, especially those who have taken the loan on floating rate basis, will have to bear the brunt of not only the current hike but future hike as well. They will have to pay higher EMIs as the interest portion will go up sharply in coming months.

A good way to cope with higher interest outgo is to make partial prepayment and bring down the total loan outstanding amount. However, prepaying the loan may not always be an advantageous proposition for many borrowers. On one hand the interest rate on home loan is among the lowest (when compared to other loans) and borrowers get unique tax saving opportunities on both the principal and interest payment. However, this has its own limitations, and, in many circumstances, borrowers are better off by making partial prepayment of their home loans. Here is when making prepayment will work for you.

When annual interest payment goes above Rs 2 lakh
Majority of home loan borrowers typically utilise up to Rs 2 lakh deduction under section 24b of the Income-tax Act, 1961 on the interest payment of the home loan on a self-occupied house. In case of people falling either in the 20% or 30% income tax brackets, this deduction ends up giving annual tax saving of Rs 40,000 and Rs 60,000 respectively. So, even if they have surplus money, they can choose to invest rather than prepaying their loans as it would bring down their loan outstanding hence the interest outgo and tax benefit as well.