Prepayment is an option offered by different financial institutions on loans. It allows a borrower to clear a portion or the whole of their loan amount with a lump sum amount, thus decreasing their future financial burden in repaying this loan. Consequently, it is important for borrowers to understand the times when it is best to avoid prepayment in loan against property.
Beginning of repayment
It is not beneficial to part-prepay a loan against property during the later months of repayment.
The interest component in the initial months of loan repayment is much higher than the principal component. As a result, prepayment in the early days of the loan will be beneficial since this will clear a large section of the principal thereby reducing the interest component.
Higher returns on investments
Mortgage loans are not just of high value, they usually do not have any end-use restriction. Consequently, if a borrower invests a section of their loan amount in a high return investment, it might be unwise to opt for prepayment. Instead, sticking to the repayment plan with the help of EMIs can be more profitable.
When related charges exceed savings
Often prepayment includes a few changes - some procedural while others might be technical charges. It is essential for a borrower to check all these related charges and check the total expenditure before applying for prepayment of a loan against property. While prepayment can save a lot of money on interest payment, it must be cross-checked with the related charges to check if it is actually saving for the borrower.
Loan against property borrowers must keep in mind these points before they opt for part-prepayment.