Home loan rates hiked: Is prepaying your home loan a good idea? Here's what experts have to say!

Benchmark lending rate increased by 25 bps by the RBI.

Should you prepay your home loan

The RBI has increased the policy rate for the sixth time in a row, dealing a blow to home loan borrowers. It raised the repo rate to 6.5% after hiking it by 25 bps. The overall hike is 250 bps since May 2022. EMIs for borrowers have already shot up and will increase more. The latest hike will increase the EMI percentage by 2-4%. Borrowers must now prepay, extend the tenure, or shell out extra money. 

Read: The RBI hikes Repo rate in December. All you need to know

Should You Prepay your Home loan?

Here are a few factors that will determine whether you should prepay:

Financial Smartness

Prepaying means you repay your home loan entirely or partly before the tenure. If you partly prepay, it helps reduce the tenure and EMI. BankBazaar CEO Adhil Shetty says borrowers must prepay their loans to control borrowing costs amidst rising interest rates. Another expert, V Swaminathan of Apnapaisa.com says borrowers must evaluate their financial situation to make a prudent decision. He believes you must prioritize your financial obligations and prepay with surplus funds. 

Investment Liquidation

Investors face a surplus fund shortage for prepayment and look to liquidate their investments to get funds for prepayment. However, this might not be the correct approach. Ladder7 Financial Advisories founder Suresh Sadagopan believes home loans have lower rates than other loans at 9%, and investments might bring higher returns. 

Read: All you need to know about RBIs repo rate. 

Tax 

You must also factor in the tax benefits you get with home loans. You get benefits up to Rs. 5 lacs with home loans. You will receive Rs. 1.5 lac deduction under Section 80C for principal repayment. You also get up to Rs. 2 lacs under Section 24(b) for interest repayment. Section 80EEA provides an Rs. 1.5 lac additional tax benefit to first-time homebuyers. You must know how a foreclosure will impact your financial and tax planning. 

The latest Budget indicates that the tax deduction-rich old tax regime will fade, and you might not receive them forever. It makes prepayment of loans a prudent approach. 

The RBI increases interest rates six times a row

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