Should you or should you not prepay your Home Loan? Keep reading to find out.
Prepaying your Home Loan can be a bit tricky, especially when you’re not aware of the formalities and extra charges involved in the process. Prepayments might be beneficial for you financially as they help reduce the burden of interest, thus reducing the overall cost of the property.
As soon as you receive some extra cash in the form of a hike, promotion or a new job that pays really well, the first thing that probably pops into your head is, “Woohoo! Let’s prepay that Home Loan now!” Getting rid of your liabilities sure sounds like the smart thing to do, but there are a couple of things that you need to consider.
Additional Reading: Should You Prepay Your Home Loan? Few Things To Keep In Mind
Before you start thinking about what to do and what not to, here are a couple of questions you need to ask yourself:
- How old is my Home Loan?
- How much tax am I saving?
- What’s the rate of interest?
- Am I finding it difficult to manage my EMIs?
- What’s the return I could get by investing the surplus cash in a good instrument?
Additional Reading:Is This A Good Time To Opt For A Home Loan?
The answers to these questions will help you determine how to go about prepaying your Home Loam. You need to know that there are a couple of things that could possibly go wrong in the process of a Home Loan prepayment. To ensure that nothing goes wrong for you, here’s a list of dos and don’ts you need to keep in mind:
Choose your loan wisely
Although this applies to the initial phase of getting a Home Loan, you need to put in a lot of research before deciding which one to go with – especially if you plan on making a prepayment at some stage. It’s advisable to check all the options being provided by various banks before taking the final call. Choose a scheme that gives you an option to prepay without charging you for it.
Know your budget
Depending upon your need—whether you’re about to purchase an apartment or an independent house, the loan amount changes considerably. If you’re planning to build a house from scratch, the charges might increase further. Choose a location according to your budget and try your best to get the right deal.
Although, it might be slightly tedious, it’s always better to reduce the loan amount rather than increasing your financial burden. Decide on a budget, choose a house accordingly and then apply for a loan. Skipping the first step might leave you financially strained in the end, and you wouldn’t want that, would you?
Pay steady EMIs
To ensure that prepaying a loan works to your advantage, keep your EMIs unchanged. When you decide to prepay, you get two options to choose from—you could either reduce the EMIs or reduce the tenure of the loan.
In both these cases, the aim is to keep the EMIs unchanged. So, choose an EMI amount you’re comfortable with and try to keep it as steady as possible. Calculate your EMI
Prepay as early as you can
The main aim of making a loan prepayment is to reduce the amount of interest paid and eventually lift some of the financial burdens off your shoulders. Most of these loans are designed in such a way that the initial EMIs go mostly as the interest component.
To put it in simpler words, the earlier you make a prepayment, the more interest you get to save. So, if at all you want to prepay, try doing it in the early stages of the loan, rather than doing it towards the end.
- Carry all relevant documents along
Once you consider every aspect involved in prepaying a Home Loan and are ready to go ahead with it, carry all the relevant documents- a government-issued photo ID proof (like a driver’s license or PAN card) and your cheque book along. Apart from making your loan prepayment, you also need to pay simple interest for the month towards which the principal is being prepaid.
Calculate the benefits beforehand
Prepaying a Home Loan might not be the best alternative in every case. Therefore, before making any hasty decisions, it’s advisable to calculate the returns that can be made from the same amount if invested elsewhere and compare it with the interest amount of the Home Loan.
Don’t overlook the tax benefits of the loan
Home Loans can offer great tax benefits with attractive rebates on the principal and interest components. That’s a good enough reason for you to never overlook the tax benefits of the loan.
Don’t prepay the entire loan amount
Many Home Loan seekers look to prepay the full loan amount. Instead of doing this, you can look at a partial prepayment if the amount for which interest is being paid is less than what the funds would fetch when invested in other financial instruments with assured returns.
Don’t forget to get an acknowledgment for your payment
Getting an acknowledgement for your prepayment is essential for you to have a written proof of the fact that you’ve made a payment. It also mentions the principal outstanding after prepayment and the balance Home Loan tenure. Remember to get it signed and stamped by an authorised representative of the bank.
Don’t forget to collect unused cheques from the bank
This is a precaution measure. Collecting cheques will ensure that nobody misuses unused cheques. Ensure collecting them to prevent misuse.
Additional Reading: Home Loan Handbook: All Questions Answered
Now that you know all about the dos and don’ts of Home Loan prepayment, it’s time to apply for a Home Loan!
Hi BB team,
I am a retired banker, aged 65 years.
Assume a home loan of 50 lakhs period 240 months, interest rate 9.75.
The amount can only be from multiple deposit accounts.
Generally the loan amount goes, forever, to another bank.
85 -90% of EMI interest received from the loan goes towards interest payment of deposits.
The period for loan is 240 months, and the average period of deposits is 30 months(assume).
THE PRINCIPAL COMPONENT GENERATED FROM 240 MONTHS LOAN, TO MEET THE PRINCIPAL DEMAND OF 24 MONTHS MATURITY DEPOSITS!!!!. Just imagine.
This can be compared to “ECLAIRS PUT INTO ELEPHANT’S MOUTH”.
This gap of PRINCIPAL can be filled by the borrower itself.
The acquired a home of his own. He saves a rent of around 25000. He can offer to start an RD of 3000 to 5000 for the longest period 120 months.This will act as a gesture of thanks to the bank. Ignore the interest rate.Slowly and and steadily, he should start multiple RDs,may be for small amount like 500/1000, but all for 120 months.The interest payment of RD is less in early years.
NOTE THIS RDs SHOULDNOT BE ENCUMBERED OR CLOSED PREMATURE LY.
Along with such RDs,the amount received as bonus should be put into FD cumulative for 120 months (ignore interest rate).
Let me take average value of RD installment as 4000.
Now the assessment of values as at the end of 120 months.
A) the loan balance as per EMI chart at the end of 120 months. =3678827
B) the acquired value of RD at 6% (ex TDS) rate,for 120 months, take this as 657716
C) the values of periodic all FDs as on 120th month, take this as 200000.
You are getting more than 20000 , by way of rent payment (because it is self occupied),you are putting only 4000 into RD. This is a gesture of thanks and also to help the demand supply mismatch, as explained earlier.
Now the valuation.
Net liability is 28211111.
Don’t pay into the loan.
Now at the end of half the period you are almost at half the liability.
Thank the bank who helped you
Don’t go to other bank for deposit to get higher interest.
Now the second half of the loan tenure will be comfortable.
Don’t heed to high value of interest of EMI. This is because you chose longer period for principal.
The earlier comment is modified.
Hi BB TEAM,
My above comments are given more clarity.
Prepayment of need not be recommended in the matter of Home Loan. Instead, try to instill some waves of gratitude towards a) the bank who gave the loan, b) towards the government who gave the benefits of 80c and 80 EE.
In favour of Bank:
On disbursement of loan, the entire amount goes to other institution/bank.
The repayment period of HL is generally longer, (180 to 300). The interest component will be high and principal component is low. The major portion interest component will go towards interest payment of deposits.
Generally the period of deposits will be lower, say an average of 36 months. Also on maturity, the chances of renewal are less.There will be high demand of principal, to meet maturing deposits. The principal flow from Home Loan, is low because the period chosen are generally high. Thus there will be huge mismatch between principal, because the principal generated from 240 months home loans cannot meet the demand from 36 months period deposits.
Hence the borrower should be thankful to the bank and adopt some measures, to help bank to improve the principal kitty.
Once he occupy the home, he saves rent. Assume the rent as 20000. He must consider to open an RD for 120 months, in the same bank, even if the interest is lower than other banks. The RD may be started after 6 months and amount may be 15 to 20 of the rental value.
THE RD SHOULD NEVER BE CLOSED OR ENCUMBERED .
When income improves he may start more RDs for 500/1000 but for 120 months, ignoring interest rates.
When you get bonus, put some FD cumulative, for 120 months.
By such an act, you are funding principal to fill the mismatch as outlined earlier.
This is the gesture of gratitude, on your part towards the bank
Now gratitude towards government.
Surely, there is interest tax on deposit.
Do the following mental accounting.
Evaluate the tax benefit of 80 C and 80EE.
Evaluate the tax you pay on interest.
The difference will be very small.
Why not pay it?(tax on interest on deposit).
Now some maths.
Loan amount 50 lakhs period 240 months interest 9.75.
RD average 4000 period 120 months interest 6.75 ex tax
Let us evaluate the position as on 120 months from loan date.
A) the balance of loan as per amortisation chart,
B) the value of RD 12o months @ 6.75,
C) the value of FD as 300000.(just assume)
The net liability is A – (B+C) = 2493516/.
50% of the loan. Happy?
Don’t remit into the loan. NO, NO NO.
In case of marriage of child education, you have a source. When put into home loan, you earn 9.75%. But you cannot withdraw the amount remitted. Instead you enjoy 80 c And 80 EE.
Know that interest on personal loan for marriage purpose, will be heavy. You can consider to withdraw the savings. And at this time you will thank me.
Having done the above measures,and continuing the RD and FD, life will be comfortable.
I request the BB team to work on my above ideas and frame a new blog highlighting the above plus any additions or deletions.
I have taken home loan of 1400000/ in october 2015. now, I want to prepay this loan. If I use my GPF for prepayment ,will this be a good option or not ?
It is best to save up money to repay your Home Loan. However, if you have other savings for your retirement, you can use your PF to repay your loan.
I have a taken a home loan of appx 50 lakhs 2 months back and only paid 1 EMI till now. I was expecting a flat sale to reduce the loan amount by further 20 lakhs. However, the sale got delayed and I got the money after borrowing the loan from LICHFL.
My question is that can I make part payment now and reduce the EMI burden ?
LICHFL says I cannot make any payment for first 6 months. Is that an RBI rule or something?
Hi Raj, Every lending firm has its own rules regarding part payment. This is not fixed by the RBI. You might have to wait to prepay your loan if it is in the terms and conditions of the loan as stated by your lender.
Hi BIREN TAMULY,
Please let us know how we can help you.
Hi BB team,
I have taken a loan of 34 lakhs loan two years back. And so far only 2.5 lakhs got deducted from principal amount and approximately i paid 7 lakhs towards interest till date. Is it a good idea to payoff the complete loan? or paying partial amount like 15 lakhs is a good idea? Please let me know. Thank you!
Hi Sandeep, If you have enough funds to pay off the loan, please do so. Else, you can make a partial payment of Rs. 15 lakhs and reduce the monthly burden to an extent. It’s your choice. Cheers, Team BankBazaar
Hi, We took housing loan from SBI in December 2013 for Rs. 8.63Lacs (Inclusive of Insurance Coverage). We Started paying EMI from January 2014 till date i.e 21.03.2018. Loan details are as follows : Total Tenure of Repayment 239 Months, Interest rate is floating. We started with Rs.8600 p.m, now paying Rs. 8200 p.m. As on today Loan Balance is Rs. 704180 /-. Now we want to clear off loan by prepayment of entire balance. Post clearance, I want to invest the EMI amount in SIP with long term goal in mind. Please let us know if this is worthy option. And how much amount we need to pay to close the loan as on today. Awaiting your response, Thank you.
Hi M Sai, You can prepay your loan if your lender allows it. There will be a preclosure fee which you’ll have to pay if you want to close your loan. If you have enough funds to clear the loan, then you can go ahead. As far as investing is concerned, we have always been advising our readers to make long-term investments a habit. And SIPs are a good start. Cheers, Team BankBazaar
Thanks for the good work you are doing on the Q&A. Very helpful. I have one question.
For a INR 53L loan with 8.5 percent interest, is it meaningful to prepay loan amount with small amounts (say 1K, 2K etc) on top of the EMI? Many advisers say to NOT PREPAY w/ SMALL AMOUNTS. What do you suggest –
> to prepay with small amounts (INR 1000, 1500 etc)
> NOT to prepay with small amounts (INR 1000, 1500 etc)
Thanks for getting in touch. Well, prepaying your loan and getting debt-free is quite relieving. But, the interest you pay on your loan EMIs is a way for the bank to make a profit. So, in the event that you decide to repay a loan six months ahead, your lender loses six months’ worth of interest on that outstanding loan balance. This is where prepayment penalties step in.
Before prepaying your loan, check if the loan you have taken has a prepayment penalty clause. If yes, then you’ll be penalized if you pay off your debt early. In case no such penalty is involved, you can consider paying small amounts on top of your EMIs.
Hope this helps!
I need your advise on choosing bank for home loan. As of now I have HDFC bank in mind to opt and don’t have any idea if they are allowing to pay part payment option or not. Can you please suggest some bank which allows for part payment (in principal amount) and flexible EMI’s.
Thanks in advance
Thanks for writing to us. We’ve got plenty of Home Loan options for you to pick from. Please click here to choose one that’s perfect for your needs. Most of the loans come with part payment facility. You can search and compare the benefits of each before opting for one.
However, before you begin, we suggest you check your eligibility for Home Loans here.
Hope this helps!