Home loan interest rates have increased following five repo rate hikes last year. Many banks have raised their interest rates for both existing and new borrowers, sparking discussions on how borrowers can reduce their interest payouts on their outstanding loan amounts. One potential option for borrowers is to prepay their home loans, either in full or in part, using their Employees Provident Fund (EPF) corpus. Let’s explore whether EPF funds can be used for home loan repayment.
Is withdrawal allowed for repayment of home loan?
Under Section 68BB of the EPF Scheme, you can withdraw your EPF amount for the repayment of a home loan, provided that the home is registered in the name of the PF member, either individually or jointly. Additionally, the applicant must have a minimum of ten years of PF contribution. So, if you have a loan and wish to utilize your PF fund for repayment, it is permissible, but it’s important to consider all options and calculate the outcomes before opting for this facility. The withdrawn PF amount is not taxed after completing five years of continuous service.
Should you do it?
Before using the PF corpus to repay the home loan, carefully consider all aspects. If you are in the early stages of your career, such as in your mid-30s, you may use the PF corpus to repay the home loan, as you have a long time to replenish the fund in your EPF account. If the home loan interest significantly exceeds the EPF interest, using the EPF corpus to repay the home loan can result in saving money on interest. On the other hand, if the interest on EPF is equal to or higher than the home loan interest, it may be advisable to avoid disrupting your EPF corpus.
For instance, if the current home loan interest is 8% per annum (p.a) while the EPF is offering an interest of 8.1% p.a., it may be preferable to refrain from withdrawing funds from your PF account to repay the home loan.
When to use PF fund
The PF corpus should be utilized as a last resort. If you are experiencing temporary financial constraints and anticipate overcoming them in the near future, you may dip into the PF corpus. However, if the duration of your financial challenge is uncertain, consider exploring other options such as extending the loan tenure to lower the EMI or using fixed deposits to manage repayment. The PF corpus is intended for retirement planning and should be safeguarded.
If you have withdrawn PF due to a job change after five years, or if you are unable to transfer your funds from one company to another, the money can be carefully used to either repay your home loan or reinvest where you can obtain a higher interest to offset 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 continuously rising and posing a risk to your income, repayment using available PF funds may be an option. However, it is important to avoid withdrawing your PF funds for repayment. If the PF funds are accessible, repayment can be considered as one of the options if other reinvestment opportunities are unavailable.
One advantage of repaying your home loan is that as the loan liability decreases, the value of your property will appreciate over time. This can enable you to earn rental income or use your resources to invest in higher returns. The disadvantage of repaying with PF funds could be missing out on higher interest through compounding and potentially forgoing the opportunity to accumulate a substantial corpus at retirement.
Utilizing surplus funds to repay a home loan is often prudent, but it’s essential to recognize that EPF is not surplus. It is a long-term investment specifically designed for post-retirement expenses. However, if you have already withdrawn your PF corpus and have no alternative investment options, using it for loan repayment may be necessary. Nonetheless, withdrawing PF for reasons other than financial or medical emergencies is not advisable.
If you can manage to repay your loan through other lower-interest investments, explore those options first. The PF should be used as a last resort for home loan repayment when other options are less attractive.
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
