Three reasons why you should settle the mortgage last if you have several loans
Most households have multiple EMIs running at once – from a home loan to a car loan to perhaps a durable consumer loan or even a credit card or personal loan. It is advisable to take out loans based on your cash flow and other expenses, there are times when the situation can become overwhelming especially if there is a job loss or a drop in salary.
If you find yourself with several loans and you are not able to manage them all, it may be a good idea to settle some of the loans to reduce the burden, both financial and emotional.
Usually, the home loan is the most important because it is taken for an expensive asset, but settling the home loan first to reduce your burden may not be the right approach. Read on to find out why.
Lowest interest cost
Typically, home loans have the lowest cost or interest rate. It is best to settle the loans that have the highest cost. These are usually credit cards and personal loans. The interest rates for these loans can go up to 20%. By comparison, some financial institutions have mortgage rates as low as around 7% for certain categories of borrowers.
Consider reducing the burden of interest charges, as this is something you pay in addition to the principal amount. It’s best to close the personal or credit card loan first, as it’s likely to have the highest interest rate. Next in line should be car loans. Auto loan interest rates are usually fixed and higher than home loan rates. Currently, they are around 7 to 8%.
“A car loan is for a depreciating asset (i.e. a vehicle), so it has to be repaid after a personal loan because the interest rates are higher compared to a home loan,” says V. Swaminathan, CEO of Andromeda and Apnapaisa, a lending distribution company and its digital arm, respectively.
Unlike a personal loan, credit card or car, the repayment of home loans offers a tax advantage on interest and principal repayment.
Given the tax benefits, home loans must be repaid after all other loans have been repaid. “When it comes to home loans, there are advantages such as tax benefits for paying principal and interest, which proves beneficial in the longer term because a home or house is an appreciating asset. and, therefore, you can try to keep them for a while,” says Swaminathan.
The main part of the EMI paid for the year is allowed as a deduction under Section 80C of the Income Tax Act up to Rs 1.5 lakh. Remember that this deduction is available if the property is not sold within five years of owning it. For the interest part of the EMI, a maximum deduction of Rs 2 lakh is allowed under Section 24B. In this case, the loan must be taken out for the purchase/construction of a house and the construction must be completed within five years of the end of the financial year in which the loan was taken out.
There could be another deduction of Rs 50,000 for the interest part, under Section 80EE, where the loan amount taken should be Rs 35 lakh or less and the value of the property should not exceed Rs 50 lakh . Additionally, there could be a deduction of Rs 1.5 lakh for the interest portion, under Section 80EEA, where the stamp value of the property is Rs 45 lakh or less.
Build an asset
Remember that a home loan helps you build wealth, which is not the case with other loans. A consumer loan or auto loan will also help you acquire and own property, but such property depreciates over time, unlike a house.
There’s no greater sense of accomplishment than prepaying or foreclosing a loan. “In doing so, it should be borne in mind that there are additional prepayment charges applicable in the event of a personal or car loan; home loans are mostly free of these fees. After paying the full amount of the closing, remember to obtain the “No Objection Certificate” (NOC) from the lender and the closing will be duly updated in the database of the credit authority . Remember to request and retrieve your original/pledged documents and removal of the lien from the pledged property or vehicle,” Swaminathan adds.