Home Loans – Should you pay off earlier than scheduled?

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Given a choice, no one would want to be in debt. Whether it is a credit card amount or a personal loan, it can be stressful. When you have a home loan, the term is usually very long and that would surely add on to your stress.

Payback and servicing the loan

One of the most common thoughts you would have when you take a loan is whether you could pay back the loan earlier than scheduled. Perhaps you won the lottery or you have a big payout that will allow you to pay off your debts. While this would work well with personal loans or credit cards, the situation might not be the same with a home loan. Settling your home loan earlier might not be a good decision even if it is possible.

Workaround lower interest

Logically, when you pay off your loan faster, you would pay less interest. This can be done in a few ways.

  • Refinancing your property – Instead of getting a longer-term when you refinance, go for a shorter one. If you have another 10 years to go in your home loan, refinancing it to a 5-year loan would mean lesser interest.
  • Yearly large payments – You can use your yearly bonus to pay extra annually. This means the principal amount will reduce thereby reducing your interest rate as well.

Is this really a good idea?

The concept of paying off your home loan earlier is a good idea. It also translates to paying less in interest over the long run. However, there are situations when you should not even consider this.

  • Disturbs your savings plan – If you have been paying your home loan regularly, there really is no need to change it as it won’t affect you much. If you are going to use up your savings to clear this loan which could mean using up your extra cash, it might not be a good idea. You’d never know when you will need the extra funds.
  • Other debts – Comparatively, home loans are usually lower than other loans like credit cards. You should prioritize clearing your credit card debts before clearing your home loan.
  • Penalty – There will always be a certain fee imposed for early settlement as banks do not encourage their customers to do so. Always check with the bank on how much you need to pay if you settle your loan early. It is common that you have to pay this fee during the ‘lock-in’ period which could be a small percentage of the loan.

So, should you or shouldn’t you?

The main factor that you must consider here is whether you will end up paying more or less if you pay off your loan earlier. While most banks do not encourage this, they are still obliged to assist you by calculating the final amount payable so that you can decide whether this move is a sound one. If you end up having to pay more than you should have, then it would not be a good decision.

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