Foreclosing a home loan? Here are the do’s and don’ts
So your heart leapt when you read last year that the RBI had disallowed foreclosure penalties on home loans, but should you now scramble to have yours closed? Not so fast, here are a few check boxes to tick before you do.
1. What percentage of your income is your EMI – an EMI of over 40% of your monthly household income is definitely not desirable, it hampers smooth budgeting and your financial planning for a secure future. So if, for whatever reasons, your EMI is over 40% of inflows, do pay off your home loan as quickly as your capacity will allow – and do consult your loan officer for every charge associated with the repayment/s.
2. Weigh the impact of losing that tax benefit – you’re currently claiming certain deductions under say, Section 80C or 24B. Assess the impact of foregoing those benefits when you plan to foreclose a home loan. Maybe now is not the right time, a careful look at the increased tax outflow needs to factor in your decision.
3. How will foreclosure impact the rest of your financial planning – There are certain mandatories in financial planning, like retirement, children’s education, insurance, health care contingencies. Your foreclosure should not be at the cost of any of these. Any funds being considered for use in repayment should ideally be surplus after considering such essentials.
4. Better sooner than later – While it isn’t advisable to foreclose your loan within 6 months of taking it, you’d incur high processing fees; direct all surplus funds into early, rather than late, repayment of your home loan.
5. Measure the trade-off between Interest paid and returns on other investment options – Your surplus funds can be invested in numerous ways, some of these may offer better returns over a period of time than the loan-interest pay-out in that same time. An exception though would be a situation where you are nearing retirement and your salary income is due to cease- in such a case, foreclosure could be more attractive.
So yes, while it is a very tempting picture to see yourself rid of a large long-term responsibility like a home loan, rushing into foreclosure may not be the right answer. Take a long, hard look at the pointers above and ensure that your decision is made optimally. If all signs point to GO even after assessing them, then foreclose away, and congratulations to you!
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