Looking To Prepay Your Home Loan? Here’s All You Need to Know About Prepayment Costs and Options!
This can be achieved if you get some extra money due to any reason like arrears, salary hike or pure lucky bonanza from somewhere!
However, it’s important to know the costs involved before making this decision.
Prepayments charges as per the type of Interest Rate
- Floating Interest Rate: RBI has waived off the home loan prepayment charges for floating interest rates. This means there will be no cost levied on paying your home loan early and any number of times.
- Fixed Interest Rate: For home loans with fixed interest rates, the RBI permits a penalty of up to 3%.
Factors to consider before prepaying
- Evaluate prepayment cost: Assess whether the savings on interest outweigh any potential penalties. Also note that if you’re in the old tax regime, interest payment only up to Rs 2 Lakh per year count for a tax rebate. In new tax regime, there is no rebate on tax anyway.
- Emergency funds: Ensure that prepaying your loan won’t deplete your emergency savings, as financial security should remain a priority.
- Investment opportunities: Assess if the funds intended for prepayment could generate better returns if invested elsewhere.
- Psychological Aspect: A loan is a loan, ऋृण or कर्ज़. Beyond a certain age or if you are uncomfortable with the idea of a loan, be very careful. Remember, life should be lived more by your comfort level rather than what mere calculations indicate.
Timing Matters
The timing of your prepayment can also affect the savings. Paying off your loan early in its term might lead to higher interest savings cost compared to later years when the interest component is lower.
(Contributed by Yogesh Gola, Relationship Manager, Advisory Desk, Hum Fauji Initiatives)
From Cradle to College: Financial Impacts of Starting a Family
Let’s simplify things so that your child has a secure financial future.
Stage 1: First Two Years – Laying the Foundation
While the early days are all about diapers and sleepless nights, it’s also a crucial time to build a financial safety net. Start by creating an emergency fund with at least 6-12 months of expenses in a liquid mutual fund to ensure any medical emergencies. Begin SIP of ₹2,000-3,000 per month to instil the habit of disciplined investing.
Stage 2: Early Childhood – Preparing for Pre-school
As your child grows, pre-school fees, toys etc can strain your budget. Manage these expenses with targeted investments. Start SIP of ₹5,000 in a balanced fund for 3-5 years.
Stage 3: Schooling and Extracurriculars – Managing Growing Costs
School brings expenses like tuition, extracurricular activities, and trips. Begin savings with goal-specific funds, say SIP of ₹10,000 per month in a diversified equity fund starting from the first year to cover education and activity costs over 10-12 years. Keep a separate fund for expensive hobbies/interests.
Stage 4: Higher Education – Building for the Future
Education costs rise 10-12% annually. Begin a SIP of ₹15,000-20,000/month in a child-specific mutual fund. This can grow to ₹30-35 lakh by age 18, covering undergraduate tuition (assuming 10% returns).
Every step of your child’s journey requires preparation, and starting early makes all the difference and secure your child’s future with confidence.
(Contributed by Neeraj Kumar, Relationship Manager, Team Dhruv, Hum Fauji Initiatives)
Finance Your Needs Today Without Disrupting Compounding: Loan Against Mutual Funds
In today’s fast-paced world, having access to cash without disrupting your investments is essential. While mutual fund redemption has traditionally been the go- to solution for accessing funds but taking a Loan Against Mutual Funds (LAMF) offers a more strategic approach that allows you to meet your requirements without disturbing the compounding effect of your investments, enabling you to enjoy both liquidity and long-term wealth accumulation.
Understanding Loans Against Mutual Funds
With LAMF, you can borrow money while keeping your mutual fund investments intact. Instead of selling, you use your mutual funds as collateral (like a security deposit). This way, you still own your investments, and they keep growing!
Why choose LAMF
- Retain Growth Potential: Your mutual funds continue to grow, so you don’t miss out on compounding returns. The lending company just puts a lien on the part of investments which is used as a collateral for the loan.
- Avoid Tax and Exit Loads of MF Redemption: When you do not redeem your MFs, you avoid the tax and the exit load.
- Lower Interest Rates: LAMF typically comes with lower interest rates than personal loans or credit cards, making it a more wallet-friendly option. Also, counting the exit load and taxes you avoid as you do not redeem your investments, the net interest rate charged in a LAMF comes out even cheaper.
- Quick Processing: With minimal paperwork and quick processing, you can access funds faster, typically in 2 days or so.
- Flexible Repayment: Repay on your own terms, with penalty-free options to clear the loan early if desired.
How Much Can You Borrow?
Borrowing limits usually range from 50-70% of your fund’s value. For equity mutual funds, limits might be lower due to market fluctuations, while debt funds offer higher borrowing percentages.
With LAMF, you get the best of both worlds: quick cash and uninterrupted investment growth. However, it’s essential to assess if LAMF fits your situation—it’s not always the right choice for everyone.
(Contributed by Bhawana Bhandari, Financial Planner, HNI Desk, Hum Fauji Initiatives)
What did our clients ask us in the last 7 days?
Question: I have a joint account with my wife as the second holder, and my daughter is the nominee. If I die without a will, how will the ownership of Mutual Fund units be transferred—solely to my spouse’s name or jointly to my spouse and daughter? Is a succession certificate required?
Our Reply: Since your wife is the second holder and your daughter is the nominee, upon any mishappening, the Mutual fund units will be transferred to your wife as the surviving joint holder. The nominee (your daughter) would not receive any units including on any joint-basis with your wife. Thus, your wife, the surviving joint holder, will become the sole owner of all the units.
Succession Certificate: A succession certificate is not required in this scenario, because the transfer of units is happening due to the survivorship of the joint holder (your wife). A succession certificate is typically needed if there is no nominee or joint holder disclosed and the assets need to be transferred to legal heirs as per the succession law applicable to you as per your religion.
However, your wife would need to provide some documents like the Notarised Death Certificate, her KYC documents, Bank details and
Transmission Request Forms to complete the process.
However, while mutual fund units can be transferred to the surviving joint holder (your wife), if your WILL indicates that the units should go to the nominee, the nominee can legally challenge the transfer. In such a case, the nominee may be able to claim the units by obtaining a No Objection Certificate (NOC) from other legal heirs, if any.
(Contributed by Team Prithvi, Hum Fauji Initiatives)
