And with RBI increasing the repo rate by 40 basis points, prepaying your PNB home loan seems the most convenient thing to do. But is it? Read on to find out how to manage your home loan and the long-term effects of prepayment.

Impact Of Rising Interest Rates On Loan Repayment

PNB Housing offers home loans at floating interest rates linked to its benchmark interest rate, PNBHFR. The prevailing market conditions again influence this benchmark rate.

Therefore, an increase in repo rate may have the effect of increasing your home loan interest rates. In such cases, you will have to increase your EMI or tenure to meet the additional financial obligation.

Both the cases will result in more interest payment. However, your interest outgo will be much higher if you increase your tenure while keeping the same EMI. One way to reduce the impact of an interest rate hike on your loan is loan prepayment.

Prepayment Options When Interest Rate Rises

In case of a rise in interest rate, partly prepaying your loans can help you avoid the extra interest outgo during the loan term.

You can readjust your PNB home loan liability with partial prepayment in different ways. One option is keeping EMI the same with prepayment, and the second is to keep tenure the same with prepayment. Let's look at the impact of both these options.

Keeping The Same EMI

You can ask your lender to calculate the prepayment required to keep your EMI the same even with the new interest rate. You will also notice a reduction in tenure if you opt for this option.

Keeping The Same Tenure

Suppose you want to repay the total interest equal to the original loan amount within the same tenure. In that case, you should be ready with a higher prepayment than in the first option. However, you will get the benefit of the reduction in EMI size.

Is There Any Charge On PNB Home Loan Prepayment?

PNB does not charge any fee for prepayment of loans sanctioned on floating rate of interest. Hence, you can partly or fully prepay your loan at any stage without worrying about charges if you have extra funds available with you.

There are no charges for a fixed-rate loan if you prepay the loan from your sources. However, PNB will charge 2% for shifting your house loan account to other banks or financial institutions. 

When To Go For Prepayments

A benefit of home loans is that it helps you save tax on both interest and principal repayment. This can be a great respite, especially for people in higher tax brackets. However, the benefit is limited to Rs 2 lakhs of interest payment per financial year. Any payment of interest above the stipulated amount does not attract tax benefits.

So if you have a high ticket loan with significant interests, it makes sense to make partial prepayments to bring down the outstanding balance to an optimum level. This way, you can make most of the tax benefits.

When Not To Go For Prepayments

If your loan is of less amount and you prefer tax saving, you need not rush for prepayment. Also, if you and your spouse are both enjoying tax benefits separately, you can continue the loan amount even if it's bigger.

Besides, you may generate higher returns in the market by investing your surplus amount in high-return investments like equities. If you have a high-risk appetite, you may be better off investing than prepaying your home loan. But take this route only if your income and cash flows are not under stress and your home loan interest rate is not unusually high.

Final Words

Being debt-free may be blissful but also a difficult feat to achieve. Hence, it's necessary to strike a balance before rushing into anything. Ensure that you have proper emergency funds and health insurance to cover you during distress before making a prepayment. Given the market's job uncertainty, experts advise saving at least one year's expense in the emergency corpus. The remaining balance can go towards prepaying your PNB home loan.