Part-prepayment in home loan
The home loan part pre-payment facility allows you to pay off a substantial portion of the principal outstanding before its due date. This helps you save on your overall interest payment and leads to an EMI reduction, a tenor reduction, or both.
There is no limit on the maximum amount, however, the minimum amount per pre-pay transaction cannot be less than 3 EMIs.
Benefits of home loan prepayment
The prepayment of home loan refers to when a borrower repays a sum over and above the EMI amount ahead of schedule. As this amount is not a part of your EMI schedule, it goes towards repaying the principal amount.
- The foremost benefit of home loan prepayment is that it helps you become debt-free sooner
- It is important to have the flexibility to prepay at your pace, since this helps you direct any additional income towards offsetting your debt
- The promptness in clearing a debt also contributes positively towards your credit score
How prepayment charges are calculated
As per RBI guidelines, individuals with a home loan linked to a floating interest rate do not have to pay any additional charges on prepayment or foreclosure. Thus, such borrowers can choose to prepay whenever they have surplus funds. Those with home loans linked to fixed interest rates are liable to pay nominal charges on prepayment. Typically, home loan prepayment charges are calculated as a small percentage of the prepayment amount.
How does prepayment of home loan work?
Prepayment of a home loan involves making extra payments to reduce the loan balance and pay off the mortgage faster. You can make partial or full prepayments, which leads to interest savings, a shorter loan tenure, and potentially reducing the overall cost of the loan. However, check for prepayment charges, inform your lender, and maintain accurate records of prepayments. Terms and conditions regarding prepayments vary by lender and your loan agreement, so it's essential to understand the specifics of your home loan.
Let’s understand how home loan prepayment works using an example of Mr. A, who takes a loan from his bank.
Loan particulars |
Loan details |
Loan amount |
Rs. 25,00,000 |
Interest rate |
8.5% |
Tenure |
30 years |
EMI |
Rs. 19,716 |
Total interest amount (30 years) |
Rs. 33,21,712 |
Frequently Asked Questions
Yes, prepayment of a home loan can significantly reduce interest payments. When a borrower prepays a part of the outstanding loan amount, the principal amount reduces, and the remaining interest-bearing amount reduces as well. Consequently, the future EMIs reduce, making the loan affordable for the borrower. Additionally, the overall interest payable on the loan also reduces.
Here how prepayment of home loan can reduce interest:
1. Reduced Principal Amount: When a borrower prepays a part of the outstanding principal amount of the loan, the borrower's outstanding balance reduces, which means a lower interest burden in the future on the reduced amount.
2. Reduced Loan Tenure: Prepayments help reduce the loan tenure. With a shorter tenure, the borrower pays off the loan earlier, which means reduced interest from the previously higher EMIs.
3. Faster interest savings: Prepayments in the earlier years of the loan have a greater impact on interest savings than the same prepayments made later on.
It is essential to remember that some lenders charge a prepayment penalty on the loan prepayment, and it may be worthwhile to check the charges mentioned in the loan agreement before considering prepayment.
Prepayment of a home loan can be beneficial for borrowers. It offers the benefits as follows:
- Interest Savings: Prepayments reduce the outstanding principal, lowering the overall interest burden and saving money in interest payments.
- Shortened Loan Tenure: Paying extra towards the principal helps in becoming debt-free earlier, resulting in a shorter loan tenure.
- Improved Cash Flow: Prepayment reduces the outstanding loan amount, leading to lower EMIs or a shorter repayment period, improving monthly cash flow.
- Enhanced Creditworthiness: Reducing the loan amount through prepayment improves creditworthiness and makes it easier to access credit in the future.
- Financial Flexibility: Prepayment provides more control over finances and allows allocation of funds towards other investments or goals.
Consider the following factors:
- Prepayment Charges: Some lenders impose fees for early repayment, affecting the financial benefit.
- Opportunity Cost: Evaluate if utilizing the funds elsewhere would generate higher returns.
- Future Financial Planning: Balance prepayment with other financial goals like retirement savings or emergency funds.
Deciding on prepayment depends on individual circumstances, loan terms, and goals. Seek advice from financial experts to make an informed decision.
Yes, home loan prepayment can reduce the monthly payment (EMI) in two ways.
Firstly, when a borrower prepays a part of the outstanding principal amount of the loan, the overall outstanding balance reduces, which leads to a corresponding decrease in the EMIs. A reduction in the outstanding principal leads to a lower interest charge, thus making the loan more affordable with reduced EMIs.
Secondly, prepayment of home loans also reduces the loan tenure, which leads to lower EMIs. When a borrower prepayments the loan amount, it reduces the outstanding principal balance. This decreased balance amount i.e., lower than the originally proposed repayment period, is then used to calculate the new reduced EMI. Therefore, prepayment of a home loan can help reduce the financial burden on the borrower as the EMIs become more affordable.
It is essential to remember that while prepayment reduces the EMI, the loan's overall repayment cost may be higher or lower depending on the prepayment amount and the remaining loan amount.
Lastly, borrowers may also have the option to reduce the EMI without opting for prepayment by choosing to extend the loan tenure to a longer period. However, this option generally leads to higher interest payments due to a longer loan period.
The decision to prepay a home loan or increase the EMI (Equated Monthly Installment) depends on several factors such as the borrower's financial goals and current situation, the loan amount and tenure, the prepayment charges, and the interest rate. In general, both options are beneficial as they help reduce the overall interest burden and the loan tenure.
Here's how to decide whether to prepay a home loan or increase the EMI:
1. Prepayment Charges: Most lenders charge prepayment penalties that can range between 0 to 2% of the outstanding loan amount. Therefore, before deciding on prepaying the loan or increasing the EMI amount, borrowers should factor in the prepayment charges into their calculations.
2. Loan Tenure: If the borrower has a long repayment tenure, then prepayment may be a better option as it will help reduce the interest burden over the long term. Conversely, if the borrower has a shorter loan tenure, increasing the EMI may be more beneficial than prepayment.
3. Financial Goals: Before opting for either prepayment or increasing the EMI, the borrower should consider their financial goals. If they have other financial goals, such as savings towards retirement, emergency fund, or children's education, it may be better to choose a lower EMI and plan for those other goals as well.
4. Interest Rates: Borrowers should also consider the current interest rates on their home loan. If the interest rate is higher, prepayment may be a better option. However, if the interest rate is low, it may be beneficial to increase the EMI.
