Today, anyone over the age of 21 can apply for a home loan. All that is needed is some margin money (a relatively small proportion of the cost of the home) and you can easily get a loan for the rest. In addition, interest rates on home loans are at single digit levels. And, to top it all, resident Indians are eligible for certain tax benefits, on the principal and interest components of a loan, under the Income Tax Act, 1961. So, it makes sense to use borrowed funds for your purchase, while you invest your own money elsewhere.
While taking a home loan, the most important element that you need to understand is how the EMIs are constructed.They comprise partly of the principal amount and partly of interest. Typically, in a housing loan, the principal repayment increases gradually, as the years go by. A bulk of the EMI, in the initial years, goes towards paying interest on the loan.
Less than a decade ago, home loans were available at prohibitive rates and the home loan market, which was at a fledgling stage, was fraught with rigidities. So, prepayment was the aim of most home loan users. Today, competition has ensured that loan seekers get the finest rates. Apart from that, the latest union budget has increased the deduction available on principal repayment of housing loans. Besides, the interest paid on a home loan is also eligible for deduction under section 24 of the Income Tax Act. Now, with low interest rates on housing loans, which get notionally reduced due to the tax benefits that accrue, the longer that a home owner can keep his loan going, the better. The law of inflation also suggests that prepaying your loan is not the best option, especially in the case of a fixed rate loan. However, if you have opted for a floating rate housing loan, you may want to prepay your loan, to avoid any uncertainty that could arise due to a rise in interest rates .
