Prepayment of Home Loan
Prepayment of Home Loan is a repayment option that enables borrowers to make a lump sum payment towards their home loan before the end of their home loan tenure. Borrowers can pay the prepayment amount over and above their due EMIs. Borrowers can either pay a portion of the outstanding amount as part-prepayment of the home loan or foreclose the loan account with a repayment of the total outstanding amount before the end of the tenure. Longer repayment tenures result in higher interest cost, which is why prepayment of home loan is an easy way to reduce your interest cost.
Home Loan Prepayment Calculator
A Home Loan Prepayment Calculator is an online tool using which borrowers can determine the suitability of the prepayment option of their home loans. It helps determine the interest cost savings and reduction in EMI tenure for different loan amounts, prepayment amount, interest rates and repayment tenures. Borrowers can visit the respective lender website and enter the loan amount, interest rate, tenure and prepayment amount in the Home Loan Prepayment Calculator to calculate their savings in interest cost.
How does Home Loan Prepayment Calculator Work?
Borrowers can visit the lender website to use Home Loan Prepayment Calculator and determine their interest cost savings. All you have to do is enter these things:
- Loan amount
- Interest rate
- Loan Tenure
- EMI already paid
- Prepayment amount
After entering the above information, click on calculate and you will get desired results.
Eligibility for Home Loan Prepayment
Borrowers can make prepayment against their outstanding home loan, provided their lenders offer this facility on their chosen home loan scheme. Some lenders may put restrictions on making home loan prepayment, which is why it is necessary to check the prepayment clause with the lender before signing the home loan agreement.
Some lenders may also allow borrowers to make a specific number of prepayments per year following the completion of a lock-in period. Borrowers may also have to bear charges for home loan prepayment.
Home Loan Prepayment Fees and Charges
According to RBI guidelines, individual borrowers who have availed home loans at floating rate of interest are exempted from paying Home Loan Prepayment Charges. However, the RBI has allowed the lenders to exercise discretion on charging prepayment fees from borrowers who have availed home loans at fixed/hybrid (fixed+floating) rate of interest.
Home Loan Prepayment Charges in fixed or hybrid loans usually range between 2-3% of the outstanding loan amount.
Tenure Reduction or EMI reduction: What to choose while prepaying home loan
Home loan lenders usually provide two options to those opting for prepayment—tenure reduction and EMI reduction. Those opting for EMI reduction would continue with the same residual tenure. Similarly, those opting for the tenure reduction option would have reduced EMI. Thus, borrowers should prefer the tenure reduction option as it offers higher scope for interest cost savings than the EMI reduction option.
Borrowers having restricted monthly surpluses can opt for EMI reduction option as their EMIs would reduce and result in monthly surpluses.
Home Loan Balance Transfer vs Home Loan Prepayment
While home loan prepayment can certainly reduce the net interest cost, opting for this option by liquidating the existing investments can negatively impact the borrower’s financial health. Another way to reduce interest cost is the home loan balance transfer option, in which the existing home loan is taken over by another lender at a lower home loan interest rate. This would reduce the total interest cost for the borrowers without impacting their existing investments and liquidity. Therefore, borrowers should use online home loan balance transfer calculators to find out their net savings in interest cost after deducting the various costs associated with balance transfer of home loan. After that, they should compare the savings derived through part-prepayment and those attained through home loan balance transfer and then make their decision accordingly based on their liquidity and financial goals.