Considering repaying home loan with EPF savings? Here’s what you need to know

Although the RBI maintained the key repo rates, several banks, including HDFC Bank, increased their repo-linked home loan interest rates by 10-15 basis points in March 2024, resulting in rates ranging from 8.70% to 9.80%. Regardless of the reasons behind these banks’ decision to raise their interest rates, borrowers ultimately face increased expenses as they must allocate more funds towards equated monthly installments (EMIs) or opt for extended loan tenures.

Numerous borrowers, eager to clear their debts swiftly, turned to using their savings or investments, such as their Employees’ Provident Fund (EPF) accounts, to repay high-interest loans promptly. However, the growing trend of using the EPF corpus for loan settlement has raised concerns about balancing loan repayment needs with safeguarding retirement funds.

Deciding to withdraw from your EPF for home loan repayment is a major step that demands thoughtful deliberation. This is because EPF savings grow with interest and constitute a vital portion of your retirement savings. Withdrawing these funds diminishes the total amount, possibly resulting in reduced retirement benefits. Financial experts also suggest exploring alternatives like debt consolidation or balance transfer to secure a lower interest rate on home loans, potentially easing repayment without tapping into EPF savings.

Should you opt for EPF withdrawal to repay your loan?

Whether you should opt for EPF withdrawal to repay your loan depends on various factors such as the urgency of the loan repayment, the amount needed, and your overall financial situation. It’s crucial to consider the impact of withdrawing from your EPF, as it can reduce your retirement corpus and future financial security. 

Before making a decision, it’s advisable to explore alternative options like debt consolidation, balance transfer, or adjusting your budget to accommodate loan repayments without touching your EPF savings. Consulting with a financial advisor can also provide valuable insights into the best course of action based on your specific circumstances.

Before choosing to withdraw from your EPF, explore all avenues to handle your home loan. Is it possible to renegotiate the interest rate, extend the loan duration, or make extra payments? Evaluate the urgency of repaying the loan. Is there an immediate necessity to settle the home loan, or can you manage the current repayment plan? Additionally, instead of withdrawing your entire EPF savings, consider a partial withdrawal. Is it possible to withdraw a lesser sum from your EPF to partially offset the loan, thus reducing the impact on your retirement savings?

Additionally, it’s important to consider the tax implications. EPF withdrawals can incur tax liabilities based on the reason for withdrawal and your tenure of employment. Familiarise yourself with the current EPF withdrawal guidelines established by the Employees’ Provident Fund Organisation (EPFO) to make an informed decision that aligns with your needs.

A home loan represents a responsibility that requires timely repayment to avoid the weight of debt. Instead of hastily depleting your savings to clear the loan, consider consulting a financial advisor. They can assess your financial status and suggest the most suitable approach tailored to your needs, taking into account both loan settlement and retirement preparation.