Prepayment of home loans allows borrowers to repay their debt over and above their predetermined repayment schedule and reduces the total financial burden. This works in favour of borrowers as they can avoid paying hefty EMIs by part prepaying the loan whenever they have surplus funds. In such a case, the paid sum is deducted from the outstanding principal to be repaid, thereby reducing the total interest liability.
Moreover, individuals can make use of a home loan repayment calculator to determine the EMIs that they would need to pay after prepaying the loan. Nonetheless, the procedure isn’t simple as additional charges of pre-paying loans are added which alters the overall cost of loan. Borrowers can choose either of the two options –
Either part prepay the loan by keeping the tenor same. In this case, the newly calculated EMIs will be smaller.
Or part prepay the loan amount by reducing the tenor. Here, one has to pay higher EMIs though the debt will be paid off faster.
It is to note that most lenders consider a sum forwarded by the borrower eligible for a part pre-payment of a home loan if it is at least equal to or more than 3 loan EMIs. Any amount below may not be accepted as a prepayment.
What are Prepayment Charges?
Few lenders levy a certain fee on the outstanding loan amount if the borrower makes a part pre-payment for the loan. The charges are generally 2-3% of the outstanding amount and may vary from one lender to another. Consequently, one should keep this factor in mind when prepaying a home loan.
Subsequently, choosing a lender that accepts prepayment of home loans at nominal charges are preferred by borrowers as it helps them reduce the overall cost of loan substantially.
How to Use a Part Prepayment Calculator?
Borrowers can calculate revised EMI by making use of this home loan repayment calculator. The tool uses following input variables to estimate the revised repayment option.
Loan tenor (in months.)
Rate of interest.
Part pre-payment amount.
Once, the borrower has put in these, they will be able to see two options –
EMI saved – It indicates the difference between revised home loan EMI to the originally paid EMIs.
Tenor saved – In this case, borrowers will be able to see the reduction in tenor for their housing loan repayment.
When Prepayment Charges May Not Be Levied on a Home Loan?
Borrowers who have chosen a floating rate of interest for their home loan can evade paying prepayment charges. Since the rates aren’t fixed and subjected to changes depending upon the benchmark rate, RBI guidelines prevent financial institutions and HFCs to charge zero fees on part prepayment or foreclosure of home loans on floating rates. This is one of the considerations to choose between floating and fixed interest rates.
In case the borrower is prepaying the fixed interest rate home loan using the funds from their sources and not by borrowing finances from other financial institutions, they can’t charge any penalty or pre-payment fee. For cases of dual rate home loans that have shifted to floating rates, no part prepayment fee is applied.
Subsequently, part prepaying loans are considerate home loan repayment options that can help individuals pay their debt faster while reducing the overall interest outgo of the loan.
Nevertheless, there are certain considerations which help individuals make informed decisions that are financially feasible.
When to Opt for Prepayment?
It is only beneficial to opt for a part prepayment when the potential interest which can be saved is significantly higher than the total associated fees.
Also, consider prepayments early in the tenor to avoid paying interest early on. Note that the interest components of a home loan EMI will be highest on the first EMI and reduce proportionately thereon.
Considering the above pointers, one can make smart decisions about prepaying a home loan. Further, utilising home loan repayment calculator works favourably as individuals can easily determine the saved tenor and EMIs for the prepayment made.
Similar Read: Understand the Procedure of Home Loan Repayment in India