When you repay your home loan before the completion of home loan tenure, it is called prepayment of home loan. You can make the prepayment in part or full. Normally, people decide to prepay the home loan when they have additional surplus.
What is Part Prepayment of Home Loan?
Let us see an example to understand the part prepayment in Home Loan:
Suppose you have an outstanding home loan of 20 Lakhs and you received yearly bonus of 3 Lakhs from your company. You decide to pay this amount towards principal home loan. Since you have not settled entire amount of 20 Lakhs and have paid only 3 Lakhs , it is called part prepayment of home loan.
Is it good to make Prepayment of Home Loan?
Not always, because you must decide based on many other parameters. If you are paying an interest rate of 9% on your Home Loan and if you are availing Income Tax deduction for this interest, your actual cost of loan will be 6.3% only, if you are in the 30% tax bracket. But, if you are in the 20% tax slab, your cost of loan will be 7.2%, and if you are in the 10% tax slab, your cost of loan will be 8.1%.
Will you prepay the Home Loan Principal?
If your cost of the loan is 6.3%, will it make sense to prepay the Principal? If you can invest the amount elsewhere and if it can generate return in excess of 6.3%, you will stand to gain by not prepaying the Home Loan. But, if you cannot invest and get such returns, it is better to prepay the Principal. For those who can follow strict investment discipline, it will be better for them to continue the EMI and invest the amount for better returns.
Charges on Prepayment of Home Loan
There are no charges on prepayment of home loan as RBI has asked banks to stop levying foreclosure charges and prepayment penalties on floating rate home loans. So, all banks like SBI, HDFC and ICICI do not charge any penalty on prepayment of the principal amount.
Is Prepayment of Home Loan Beneficial?
Let us see if the prepayment of home loan is beneficial:
Benefits of Prepayment in the early years of the home loan
Interest part is higher in early years of home loan.
Let us take an example:
Loan Amount: 30 Lakh, Loan Term: 20 years, Rate of Interest: 10%, EMI: Rs. 28,951.
In the first year, you will be paying an amount of Rs. 3,47,412 by way of 12 EMIs. Out of this, only Rs. 49,642 goes towards repayment of Principal because an amount of Rs. 2,97,770 goes towards Interest by the lender. If it is a self-occupied house, you are eligible for tax deduction on only Rs. 2 Lakh in a year. In such cases, it is better to prepay the Principal.
Suppose you are repaying Rs. 5 Lakh Principal after paying 12 EMIs, after this, your outstanding Principal will be Rs. 24,50,358. In this case, your number of future EMIs will reduce from 228 to 147. As a result,You can close the loan around 7 years earlier than proposed. This is a huge benefit for prepayment of home loan in early years. In this case, your Interest payment in the next year will be around Rs. 2.4 Lakh and you can still get the full amount of deduction towards Interest paid. Here, you will be saving a huge interest outgo. But, if you want to reduce EMI and retain the original term of the loan, then the revised EMI will be Rs. 24,049, a reduction of Rs. 4,902 from the original EMI.
Prepayment at later stages of the Loan?
In the example given above, suppose the party paid the EMI for 15 years and only 5 more years are left. Let us see the effect of prepayment of Rs. 5 Lakh. After 15 years of EMI, the outstanding Principal will be Rs. 13,62,573. If you prepay Rs. 5 Lakh at this stage, the outstanding loan will be Rs. 8,62,573. This will help you in closing the loan in the next 34 months instead of 60 months, a savings of 26 months. Please compare this with the reduction of 7 years in the term of loan, if you prepay during the early part of the loan.
Home Loan Prepayment Advantages
Though it is always advantageous to make prepayment of home loan as it reduces the psychological as well as financial burden . But keep the following things in your mind before prepayment
- You have required corpus for emergency fund.
- Your financial goals like child education, child marriage & retirement planning etc. are not getting impacted.
- You are not stretching yourself too much that it is affecting your health.
But the house will be yours, if you close the loan early
Yes, you will have the satisfaction of having the home debt-free, if you prepay the Home Loan and transfer the home in your name as per the records of the lender.
So, what is your view on “prepayment of home loan”? Also, share it with your friend and family.