Home loan interest rates have gone up after five repo rates hikes last year. Many banks have increased their interest rates for both the existing and new borrowers. This has led to discussions around what should borrowers do to reduce their interest payouts against their outstanding loan amount. One of the options borrowers can explore is to prepay their home loans either fully or partially using their Employees Provident Fund (EPF) corpus. Let’s find out whether EPFO funds can be used for prepayment.
Is withdrawal allowed for repayment of home loan?
According to Section 68BB of the EPF Scheme, you can withdraw the EPF amount for repayment of your home loan. However, the home must be registered individually or jointly in the name of the PF member. The applicant needs to have a minimum of ten years of PF contribution record. So, if you have taken a loan and want to use your PF fund to repay it, you can do it, but do consider all options and do the math before opting for this facility. The withdrawn PF amount is not taxed after the completion of continuous service of five years.
Should you do it?
Before using the PF corpus to repay the home loan, check all the aspects carefully. If you are in the early stage of your career, say in the mid-30s, you can use the PF corpus to repay the home loan because you have a long period at hand to replenish the fund in your EPF account. If the home loan interest is substantially higher than the EPF interest, you can use the EPF corpus to repay the home loan and save money towards interest outgo. On the other hand, if the interest on EPF is higher or equal to the home loan interest, you may avoid disturbing your EPF corpus.
For example, if the current home loan interest is 8% per annum (p.a) but the EPF is offering an interest of 8.1% p.a., you may avoid withdrawing funds from your PF account to repay the home loan.
When to use PF fund
The PF corpus should be used as a last resort. If you are in a temporary financial crunch and expect to come out of it in the near future, you may use the PF corpus. However, if you are unsure when your financial problem will get over, you may first explore other options like increasing the loan tenure to lower the EMI or using FDs to manage repayment. The PF corpus is meant for your retirement planning, and you must keep it safe.
If you have withdrawn PF due to a job change after five years or you are unable to transfer your funds from one company to another, then the money can be carefully used to either repay your home loan or reinvest where you are getting higher interest to compensate for the interest you are paying for your home loan.
Pros and cons of using PF to clear home loan
If home loan interest rates are rising continuously and you feel that this could impact your income, you can consider repayment if your PF funds are available. However, you must avoid especially withdrawing your PF funds for repayment. If the PF funds are available, you can opt for repayment as one of the options in case you are not able to find any other option for reinvestment of that money.
One of the benefits of repaying your home loan is that your property value will increase with time while your home loan liability will decrease. You can earn rental income or use your income for investing in higher returns generating instruments. Disadvantage of repayment using your PF money could be losing out on higher interest due to compounding. You can also miss out on accumulating a big corpus at retirement.
Adhil Shetty, CEO, BankBazaar. com, says, “Using surplus funds to repay your home loan is often prudent, but EPF is not a surplus fund. It is a long-term investment meant specially for post-retirement expenses. However, if you have already withdrawn your PF corpus and cannot invest it elsewhere, you may use it towards loan repayment. That said, withdrawing your PF for anything other than a financial or medical emergency is not advised.”
If you can manage to repay your loan through other investment where interest is lower, you must explore those options and PF should be used as a last resort for repayment of your home loan when other options are less lucrative.
A Fine Balance
- If you have contributed to EPF for 10 years, you can withdraw funds to clear home loan
- You can go for it if the interest on loan is much more than the EPF interest
- Remember you will lose out on building a big retirement corpus
