Why You Should PrePay Your Home Loan Now

By BankBazaar | February 24, 2017

Why You Should Pre-Pay On Your Home Loan Now

You know what they say about loans: clearing them quickly is your first step towards building wealth. Sure, loans can help you create assets and wealth, but lingering outstanding debts can be a financial burden that slows you down in your quest for financial independence.

Therefore, any surplus money should not only be used for savings and investments but should also be used to clear your debts.

Additional Reading: How to clear debt using the snowball method

This is a good time to prepay

This is the right time to make partial prepayments towards your loans, especially your Home Loan, since interest rates have been falling over the last couple of years. And with inflation currently under control, they are likely to stay low in the short term.

When you prepay when interest rates are low, you clear a part of your debt at a rate that may be cheaper than the rate you had borrowed at. Such prepayments will help you remain financially strong when interest rates start trending upwards in the future.

Additional Reading: How To Plan Home Loan Prepayment

How it can help you save money

The longer you sit on a loan, the higher you are going to have to pay in terms of interest. By accelerating your debt repayment, you can save a lot on interest since a significant part of the EMIs you pay towards clearing a loan goes in paying interest.

Many Home Loan products don’t penalise prepayments, which gives you more incentive to make a dash for it. The table below gives you an understanding on the amount of money you can save through prepayment.

Analysing Loan Repayment Options
Option Loan Amount Interest Rate (Pa) Tenure Remaining Total Interest Payable* EMI*
A Scheduled EMI and tenure Rs. 10 Lakh 10.00% 5 years Rs 2.75 Lakh Rs. 21, 000
B Same EMI and reduced tenure Rs. 10 Lakh 9.00% 4 years 10 Months Rs. 2.37 Lakh Rs. 21, 000
C Lower EMI and same tenure Rs. 10 Lakh 9.00% 5 years Rs. 2.45 Lakh Rs. 20, 700
D Increased EMI and reduced tenure Rs. 10 Lakh 9.00% 4 years 4 Months Rs. 2.11 Lakh Rs. 23, 300
* Approximate figure

As the tables suggests, a borrower gets maximum benefits when he opts for an additional payment above the EMI amount and closes the loan earlier than scheduled.

Additional Reading: Get A Sweet Deal When Prepaying Your Personal Loan

How to clear your debts early

Repaying a long-term debt requires financial discipline. If you’re looking to prepay on your loan, you can consider avenues that will increase your savings, such as cutting down on lifestyle expenses. Any surplus such as performance rewards, holiday bonuses, etc. should be used for the same purpose.

You could talk to your banker to bring down your interest rates by switching from the base rate to MCLR or moving your loan from your bank to another. You could also divert funds from a low-yielding investment instrument towards your loan.

Having a budget in place can help you keep your spending under control, thus helping you to put your money to good use. A debt paid off in time or before time will only increase your Credit Score, thus improving your chances of getting loans in future.

Hopefully, this should convince you to strike while the iron is hot and go about preparing to prepay your Home Loan as soon as possible. It could certainly be to your advantage.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

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