Strategies and Considerations for Loan Against Property Prepayment

A house or a flat is not only a place to live but also an investment whose price tends to in appreciate in various market conditions. However, most people cannot sell off a property they own to get funds during a financial emergency. In such a situation, opting for a loan against property is a better choice. 

A loan against property (LAP) is a secured loan which a person can obtain by mortgaging a property to a bank/NBFC for a certain sum. Most financial institutions offer flexible repayment terms to LAP borrowers. This includes the loan against property prepayment facility that borrowers can use to reduce their debt burden.

The following sections throw light on the strategies and considerations of LAP prepayment. 

Strategies to plan loan against property prepayments

By prepaying one’s loan against property, one can reduce his/her loan tenure or EMI amount. One can follow any of the strategies mentioned below to foreclose their LAP.

  • Use one-time payments and windfall gains wisely

Windfall earnings like winning the lottery or some unforeseen income pave the way for a borrower to become debt-free faster. One can also save their bonus, incentives and similar income and use the saved money for a loan against property prepayments.

Individuals can save these amounts and pay a lump sum to lower their EMIs. If a person’s salary increases, it will become easier for them to save more and foreclose the loan quite early.

  • Opting for a loan overdraft facility

Several banks offer different options to prepay a person’s debt. One such interesting option for a loan against property prepayment is the LAP overdraft option. This allows a borrower to deposit an advance in a savings account linked with their loan account.

Before applying for a  loan against property, a borrower should check whether his/her lending institution offers this facility or not. If yes, they can deposit their surplus income (after paying EMIs) in their loan account or use it later if required.

  • Wisely one’s increased disposable income

To maintain a healthy debt-to-income ratio and prepay one’s LAP early, one can choose to increase their monthly obligations. If a person’s income increases during the loan tenure, they can increase their monthly repayments. This will help them complete the loan repayment early. This will also allow them to save or make certain extra expenses when their salary increases. 

Additionally, making LAP repayments will also allow a person to lower their future EMIs as the loan interest gets paid. When the interest rates are falling, one can plan their EMI payments wisely with the prepayment option to shorten their loan tenure as well. 

  • Save enough to meet prepayment goals

To pay a loan against property EMI, one must follow a proper financial plan. The main aim of this plan will be to help an individual bear their expenses while paying additional money to close their loans. 

Along with this, their financial plan must focus on saving a surplus amount at the end of every month. They can start a recurring deposit with this amount which will compound periodically. This will help a person make regular prepayments to eventually reduce the tenure or EMI amount. 

Key points to consider before prepaying a loan against property 

Loans against property prepayments are a good option to reduce one’s loan tenure. However, borrowers must keep certain things in mind while planning to prepay their loans. 

  • Make an effective financial strategy

Before opting for any kind of loan, one needs to formulate an effective financial strategy for managing finances. To make a financial plan, a person needs to calculate their income, expenses and EMIs beforehand. 

One can do the calculations manually or use a loan against property EMI calculator available online. Borrowers can get an idea of their financial standings and eligibility to apply for an LAP using an eligibility calculator of a financial institution.

A financial plan helps a person set aside money to repay their debts and meet other financial needs. By strictly abiding by a financial plan, a person can timely pay his/her debts and save amounts for emergency purposes like trips, medical needs or weddings. They can also put aside a surplus amount at the end of every month, which can help them prepay loans against property.

  • Consider loan against property prepayments during the initial years

If an individual is planning to opt for prepayment of their LAP, they must do so during the initial years. This is because, during this period, the rate of interest is comparatively lower than the latter part of the loan tenure. Prepayment of LAP during the initial years will help one avoid paying a large interest amount and keep EMIs in check. This ultimately allows borrowers to complete their monthly obligation before the tenure ends.

  • Look for the prepayment lock-in period

Many banks/ NBFCs impose a prepayment lock-in period that ranges between 1-3 years. During this period, one cannot make any prepayments on their loan against property. Therefore, before opting for an LAP, one must consider checking with their bank/NBFC whether they have a pre-payment lock-in period or not. If yes, a person must only opt for that bank, if his/her plan aligns with making LAP prepayments after 1-3 years.

  • Loan interest rate

Financial institutions structure LAPs in such a way that the interest component of EMIs continues to decrease over the loan’s tenure. This means that the sooner a borrower repays their EMIs, the lower the overall interest they pay on their loan. So, if a borrower has surplus funds, they might want to prepay their outstanding loans.

With floating interest rate LAPs, borrowers can choose to make large prepayments when the interest rates are falling. This could reduce the outstanding loan balance significantly. 

  • Consider analysing other loans

Before an individual decides to prepay his/her LAP, they must first consider their other debts. If a borrower has multiple debts with comparatively higher rates of interest, they should focus on prepaying the loan with the highest interest rate first. They should opt for LAP prepayments only if they have sufficient funds after paying all EMIs.

Doing the opposite thing can lead to the accumulation of high interest on other loans. This can lead to financial indiscipline and make it difficult for the borrower to manage his/her finances. 

Many banks and NBFCs provide pre-approved offers for financial products like LAP for their long-standing customers. These pre-approved offers help expedite one’s loan application process. One can check property loan eligibility for pre-approved offers by visiting the online portal of their respective website. 

The loan against property prepayment facility allows borrowers to become debt-free faster. It also helps an individual boost their credit score to a healthy limit. After prepaying an LAP, one must collect the necessary documents from lenders and maintain a record till the end of the tenure. 

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