Home Loan Prepayment

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Home loan prepayment involves making a lump sum payment towards a home loan before the end of the tenure. Repaying your home loan partially or completely can help save on the interest payable.

It can also help reduce the EMI amount and repayment tenure.

Benefits of Prepayment of a Home Loan

The home loan prepayment facility is a boon for individuals with an active home loan. Here are some of the most important benefits of prepayment of a home loan:

Helps reduce the interest burden and the overall cost of the property
Improves your chances of getting other types of credit when you prepay your home loan
Enables you to enjoy financial independence, allowing you to invest funds in other avenues

What is a Home Loan Part Prepayment Calculator?

A home loan part prepayment calculator helps you ascertain the EMI amount you will have to pay after you have prepaid a portion of your outstanding principal amount. When checking the amount, you have to factor in applicable loan processing fees and charges as well.

Here is a brief overview of how this tool works exactly. As an example, consider the following numbers for illustration and elaboration purposes:

Principal Home Loan Amount = ₹40 Lakhs
Tenure = 20 years
Rate of interest = 9% p.a.

Using a home loan EMI calculator, you get an EMI amount of ₹35,989. This instalment amount is your monthly outflow towards your home loan repayment.

Say you prepaid a sum of ₹2 Lakhs in one go, which will consequently reduce your EMI amount to ₹34,190, which means that you will save ₹1799 every month. Alternatively, you can choose not to get any changes made to your monthly EMI amount and get the repayment tenure of the home loan reduced instead.

Once you are familiar with the aforementioned variables, key in the details in the online calculator to determine the final EMI amount you will have to pay post prepayment.

Home Loan Prepayment Charges

You must keep one thing in mind that you may have to pay an additional fee or other associated charges on prepayment of the loan.

However, such charges aren’t mandatory. The levying of home loan foreclosure charges depends on factors such as the type of applicable interest rate and the kind of lender you opted for when availing the home loan.

Banks or housing finance corporations charge prepayment fees so that they can partly make up for the interest revenue that they may lose as a result of prepayment.

In some cases, lenders even charge a home loan prepayment penalty.

A prepayment penalty is generally levied on home loans at fixed interest rates. This penalty is levied to cover the loss of interest on the home loan.

While this penalty can vary between 0.5% and 3% of the total amount, note that it can vary depending on your loan agreement terms.

Home Loan Prepayment Rules

The Reserve Bank of India (RBI) has laid out a set of guidelines that specifies the conditions under which financial institutions can levy home loan prepayment charges. Some key factors taken into consideration include the following:

The type of financial institution that has lent the housing loan
The kind of interest that is being charged (fixed or floating)

1. When Banks Cannot Charge a Penalty

Banks cannot charge a home loan prepayment penalty under the following circumstances:

No prepayment charges should be levied on home loans taken with floating interest rates
When the prepayment of a home loan is initiated using your own source of income, lenders are not allowed to charge any prepayment penalty
If you decide to change the interest type from fixed to a floating rate, the lender will not levy any prepayment charges

2. When Banks Can Charge Prepayment Penalty

Banks can charge a prepayment penalty under the following circumstances:

If you avail home loans at a fixed interest rate, you can be charged prepayment fees

When you procure your home loan from ‘non-individuals,’ such as a co-borrower or a third party, such as a company or firm, you are liable for prepayment charges

It is important to know the RBI guidelines to ensure that you do not end up paying extra prepayment charges on your home loan. Hence, it is prudent to go through the terms and conditions of the loan agreement to know about the consequences of home loan prepayment when opting for a home loan.

Updating Prepayment Details in the CIBIL Database

When you complete your home loan prepayment, the lender updates the same on the CIBIL database. Hence, the outstanding home loan balance in your CIBIL report will be revised accordingly.

It takes around 30-45 days for your CIBIL report to get updated with the revised outstanding amount.

Things to Consider Before Prepaying a Home Loan

A few points you must be mindful of before prepaying your home loan include the following:

Potential Savings

Prepaying a home loan in the early years of the repayment tenure can help you save lakhs of rupees you may have otherwise paid as interest.

Given that the interest component of EMIs is higher in the initial period than in the later years, you will not save much if you repay the home loan towards the end of the tenure.

Alternate Use of Money

You can use the surplus influx of cash to reduce your debt burden. Alternatively, you can use the surplus money to make investments, earning you better returns and helping you build your wealth.

If you are close to retirement, foreclosing the loan to avoid defaults is an ideal option at a time when you do not have an income source.

However, if you are young, have a stable income source, and have other expenses to take care of, you must think twice before prepaying. Ultimately, the decision of prepayment lies in your hands, and you must do what works best for you.

Future Requirements

You must consider your future monetary requirements and plans before prepaying your home loan. Although it is ideal to get out of debt early, prepaying a home loan can deplete your savings as it involves a massive amount.

Tax Benefits

Home Loan EMI payments entitle you to enjoy home loan tax benefits under various sections of the Income Tax Act, 1961, and help you save lakhs of rupees each year. However, to avail them, you must meet the conditions laid out under these sections.

If you make a full prepayment, you can no longer claim tax benefits. This, too, is a critical aspect you must consider when thinking of home loan prepayment.

Is There Any Reason Why You Should Not Make a Prepayment?

While there are numerous benefits of prepayment of a home loan, know that not every loan prepayment can yield a good impact. There are certain reasons why you may not choose to prepay your loan amount. Some of these reasons are:

Penalty

The foreclosure of home loan amounts may attract penalties. It may go as high as 6% of the total loan amount. So, you must only opt to close your home loan early after knowing all about the prepayment penalties.

Loss of Savings

You will only be able to make a home loan prepayment if you have sufficient surplus money. When you plan to foreclose the loan using your savings amount, it can deplete your funds. So, considering other financial commitments of life is essential before submitting a huge chunk of money to your lender.

Loss of Tax Benefits:

When you claim for tax deductions at the end of the financial year, the loan repayment of your home allows you to get a tax deduction of up to ₹2 Lakhs. Hence, if you foreclose your home loan, you may lose out on tax deductions and get lower tax benefits.

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Amount Based Home Loan EMIs & Eligibility

How are Prepayment Charges Calculated?

Prepayment charges are decided by banks or housing finance corporations at their own discretion. They generally tend to stay within the range of 0.5-3% per annum.

Is prepayment of a home loan beneficial?

Prepayment of home loans allows you to get your EMI amounts reduced by a considerable margin or get significant alterations made to the length of your repayment tenure. However, while considering the same, applicable charges stated by the lenders, if any, must be taken into consideration.

Does prepayment reduce home loan interest?

Prepayment reduces home loan interest in terms of reducing the overall amount you will have to pay as interest on the outstanding principal. However, alterations in the home loan interest rates themselves as a result of prepayment are rare.

You can get your interest rate altered as well to reduce the overall burden, but it will depend on the kind of relationship that exists between you and the lender.

Does the home loan prepayment attract additional charges?

Depending on the terms of the home loan, you may be charged a prepayment penalty.

What are the latest guidelines of the Reserve Bank of India regarding the prepayment of a home loan? Are there any penalty charges?

The latest guidelines of the RBI state that lenders can charge a prepayment penalty only when the loan is still in fixed-rate periods. Once it enters the floating rate period, borrowers will not have to pay any prepayment penalty.

When and what is the right time to make prepayments?

The most appropriate time to prepay a loan is the initial months of the tenure. This helps save on interest as much as possible. Thus, it can lead to increased savings on prepaying a loan early.

Do all the banks allow home loan prepayment?

Most of the banks allow home loan prepayment unless you have signed any document that forbids it. However, the prepayment penalties vary considerably from one bank to another. Hence, you should check them before proceeding.

What is the difference between home loan prepayment and home loan repayment?

Repayment refers to the regular payment of monthly instalments to pay off the principal you have borrowed along with its interest. However, prepaying refers to paying the outstanding money in small parts or all at once before the completion of the loan tenure.