Five reasons why you shouldn’t pre-pay your Mortgage early!

This may result in quick financial relief and freedom from our monthly EMIs, but a deeper look into this decision can help us realize that there are actually great advantages to holding on to your home loan until the end of the tenure.

Feb 05, 2015 06:02 IST others Sukanya Kumar |

Due to the aspiration of escaping from our monthly housing EMIs or due to a sudden inflow of income, many of us may jump to pay off our mortgage. This may result in quick financial relief and freedom from our monthly EMIs, but a deeper look into this decision can help us realize that there are actually great advantages to holding on to your home loan until the end of the tenure.
 
This is a decision that many borrowers may face during the tenure of their home loan. While it may seem tempting to quickly end your home loan, there are other investment options for your sudden flow of income that should be considered. In fact, these investments may end up giving you much greater returns than the interest you pay on your home loan. Let’s look at 5 of the biggest reasons to hold on and not give in to the temptation of pre-paying your home loan.
 
1. It is the cheapest loan available in India!
With the current home loan interest rate levels, it is certainly the cheapest form of credit available to you. Other financial lending products such as personal loans, educational loans, credit cards and business loans are significantly more expensive than home loan products. So this begs the question, why pay off the cheapest loan? Rather, it’s better to pay off the other types of loans and hang on to your mortgage.
 
2. Maximize the Premium on your Retirement Plan instead
Over the years with the increase in inflation and cost of living, it is scary, at the least, to imagine living without a regular inflow of funds post retirement. Understanding this fear, retirement products are a must to secure your future. In case of extra funds, it would make logical sense to invest your surplus funds into retirement products enabling you to sustain a steady income post-retirement. It is advisable that people invest into these products rather than using them to repay the mortgage.
 
3. Save Tax!
Sections in the Income Tax Act, namely 24(b) and 80EE, allow for significant deductions on the interest payable on a housing loan. These deductions are major advantages of not paying off your mortgage early. Why pay it off and lose the tax benefit?
 
4. Build a contingency fund
We live in a world of uncertainty, and the need for surplus funds may arise at any time. It is always a good idea to keep a contingency fund for unplanned medical, repair, or accidental expenses that may just crop up every once in a while. Surplus funds should be used as a contingency corpus for these types of expenses that cannot be predicted. Today, lenders even offer a unique overdraft product wherein you can park your liquid cash in their current account and avoid paying interest on your home loan, which can be termed as a 'virtual foreclosure' but without really repaying it.  This product definitely deserves consideration. If you are unsure about understanding this product, consulting an loan expert to understand the true benefits is a great idea.
 
5. Enjoy your retirement
After working for most of your life, we all deserve to enjoy our post-retirement phase. Saving for travelling the world, spoiling your grand kids, or just plain enjoying your life is a great idea. Most people spend 25-30% of their lifetime's earning post-retirement, why spend it in a cash-poor and miserable way? Invest into enjoying this phase of your life from now, and avoid using free funds in foreclosing your mortgage.
 
After analyzing the benefits, it’s easy to see why you should resist foreclosing your home loan sooner than required. There are many better ways to use your surplus funds, and these methods are bound to give you true financial security, peace of mind and happiness in the future. Maybe counter intuitive, but definitely the smarter move!
 
The author is Founder and Director, RetailLending.com

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