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Is it beneficial to settle the housing loan earlier?
Posted on: 06/Aug/2018 3:56:29 PM
Though the interest rates have started going up, it is always best advisable to avail the tax benefit by taking the housing loan and paying EMI rather than closing it earlier.
The Reserve Bank of India has recently announced an increase in Repo Rate. This has led to a situation where the interest rates for the housing and other loans are likely to go up. Several banks had already increased their interest rates for the housing loans. In this scenario, RBI ‘s recent upward revision of Repo Rate for the first time after the year 2013 confirms that the interest rates on other related sectors will also go up. So, the people who have availed housing loans have become anxious and have already looked for ways to counter the burden of the additional interest.
Though it is certain that the interest rates are bound to go up, it is relief for those who have availed housing loans there is no immediate negative repercussion. As for those who have availed housing loans on the basis of MCLR rates, the old interest will continue. The interest rate may go up later. However, those availing loans now will need to avail the loan only at higher interest rates.
Those who are currently paying the EMIs for the housing loan, need to know the details of the revised interest rates after the reset period and act accordingly. It is worth exploring to change the housing loan to another bank which may offer lower interest rates. In case there are avenues to pay some part of the loan and it can be afforded, it may be worthwhile paying a certain part of the loan at this stage. This measure is considered beneficial for those who are in the 1st half of the loan repayment period. The repayment amount paid during the 1st half of the loan period can provide additional interest in the long-term.
It is also worth exploring the opportunities/worthiness of those who make the repayment and settle the housing loan taken. Though it is true that the debt burden will come down by making the earlier payment of the loan taken, it is worth remembering and reconsidering the Income Tax concessions availed by taking the housing loan. So this factor must be considered before taking a decision on the repayment and settling of the housing loan.
There is a provision of getting a concession of maximum up to Rs. 2 Lakhs while taking the housing loan. This opportunity will be lost if the settlement of the loan is made earlier. Instead, it would be advisable to continue paying the EMI as scheduled,
When availing the Income Tax concession through availing of the housing loan, there will be no need to make any additional investments to reduce the Income Tax paid as already a concession of up to a maximum of Rs. 2 Lakh is available from the housing loan. The amount has needed as an additional investment to reduce the Income Tax burden can better be invested in other avenues with scopes of earning more interest leading to a 2-way benefit – 1st, enjoy the provision of Income Tax relief having taken the housing loan and 2nd, enjoying the additional interest from the investment referred above. The financial experts also observe that this is more sensible/
Another factor worth considering is that while the interest rate is going up for the housing loan, there may be additional interest earned in other avenues like investment in n Provident Fund and other small saving schemes. The person who wants to avoid risks while expecting some steady returns can avail better benefit by investing in several small-scale saving schemes.
Thus, it is better to calculate the amount required for saving Income Tax and then taking a decision regarding the amount to be paid as part of settling the housing loan.
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