Pre-Pay Home-Loan: The Lesser Known Options

The home loan interest rates have been on a high for quite some time now, disturbing your monthly finances. To add further woes, the scenario is unlikely to change as RBI is contemplating another hike in policy rates due to high inflation numbers for recent months (July @ 9.22 per cent) in its next monetary policy announcement on 16 September. In such testing times, one would wonder about the possible options to bring EMI burden to manageable proportions.

Beside the well-known personal loans, loan against property, against gold, securities, etc., there are cheaper options available in terms of loan / withdrawal against your PPF, Employee’s Provident Fund (EPF), and General Provident Funds (GPF). Though, these fixed income instruments are meant for one’s golden years, and ideally, should not be disturbed; however, in high inflationary times such as today, these options are worth exploring. Today, those who would have taken home loans prior to 2008, most probably have seen their floating rates gone up by a good 3-4%. Let’s find out what these securities have in store:

PPF

Your PPF account, though meant for retirement benefits, does provide liquidity options through loan & withdrawal options. One can take loan on PPF accounts between the 3^rd year to 6^th year of opening the account. For this purpose, any fraction of financial year would be treated as a full year. The maximum loan amount is however restricted of 25 per cent of the balance in your PPF account, at the end of the first financial year.

On the other hand, if this is not your first loan on the basis of PPF account, the loan could only be availed provided the earlier loans are fully repaid. This can also be taken between 3^rd year to 6^th year of account opening. It is because after 6^th year, withdrawal facility can be made available to you, limiting the loan facility. In addition, inactive or discontinued accounts are not eligible for loan.

Also, here if the loans taken will be repaid within 36 months, the interest rate applicable would be 12 per cent per annum. However, if the tenure of loan is more than 36 months, interest rate of 6 per cent will be charged on monthly basis. Here, it makes more sense to tale loan on PPF only if the person is sure of repaying it within 3 years (36 months’) duration.

Let’s look at the example below to find how loan on PPF option can be used and how cost-effective will it prove, if any:

Original Home Loan With Bank:

Fresh Loan on PPF

Revised Loan Credentials After Prepayment Through PPF Loan

Cost Benefit Analysis

In this example, the overall savings by prepaying home loan with the help of loan on PPF will be Rs 8, 09,257.40.

Always remember that earlier you do it, better it is for you as earlier EMIs constitute maximum portion of interest component; and hence, you would end up saving more interest amount. But please beware that any outstanding loan sum beyond 36 months attracts 6% per month on the outstanding amount, which is very costly in deed.  

In addition to loan option, PPF also allows withdrawal option after the expiry of 6^th year. Here, you are allowed to withdraw up to 50 per cent of the balance at the end of 4^th year or two years before taking loan, whichever is lower. For e.g., if the account was opened in 2000-01, and the first withdrawal was made during 2006-07, the amount you can withdraw is limited to 50% of the balance as on March 31, 2003, or March 31, 2006, whichever is lower.        

Employee Provident Fund

Your monthly 12 per cent contribution to employee provident fund can also get you the requisite funds for pre-payments of housing loan, if you have your employee provident fund contribution of at least five years in the EPF account. Here, the loan option would be available on your PF contribution only, and not on employer’s contribution. The amount of maximum loan and the interest rate is internally decided by companies, but will be cheaper than personal loans, nonetheless. To get this information, you need to contact your employer and find out how cost-effective this option would prove, if at all.

However, if you are withdrawing the EPF amount, Para 6B-BB of the provisions of Employees Provident Fund Scheme 1952, allows advance from the provident fund for repayment of housing loans. The scheme allows withdrawal for specific purpose, which includes the purchase of land for house, construction of house, any alternation / addition / improvement to the dwelling unit, etc.  

For the purpose of loan against EPF for re-payment of housing loan, one should have completed 10 years of services and must fulfill the conditions listed below:

EPF Withdrawal For Home Loan Re-payment  

Further, the amount of advance / withdrawal is not required to be refunded under normal situations. However, if the sum is not utilized for the purpose specified, the same should be refunded with penal interest as specified by EPFO from time to time. A fixed minimum balance in the account will be kept before arriving amount that can be utilized as loan, subjected the above conditions. If you fulfill the criteria, you can fill Foam-31 and submit it to your employer.  The form is readily available on internet.

General Provident Fund

General Provident Fund (GPF), an investment pooling vehicle provides liquidity through in-built withdrawal option. The scheme is meant only for Government Employees. Under this, government employees can withdraw up to 90 per cent of the credit balance of GPF account, only if the withdrawal amount alongwith already taken government loans’ amount, do not exceed the limits prescribed under House Building Advance (HBA) rules. This facility can be availed only once during the service tenure.

Conclusion

According to our analysis, PPF appears to the preferred option amongst others, if you can pay back the loan within 36 months. The EPF facility is viable but details would depend upon your company and interest rate applicable. It is likely that the interest rate on EPF would be higher than interests on PPF loan, considering its higher deposit rates, i.e., 9.5 per cent as compared to 8 per cent for PPF. The GPF option is restricted to government employees only, but withdrawal amount is higher at 90 per cent of the balance amount.