A home loan is a long-term financial commitment, which offers the flexibility to repay the loan amount over up to 30 years. However, this does not mean that one should live with this financial burden for that long. It is wise to repay a loan early, not just to attain one’s mental peace but also to lower one’s financial burden.
Most banks and institutions provide prepayment facilities for this purpose. The prepayment process for a housing loan is quite straightforward, thanks to the simplified steps and processes.
The payment for any type of loan — be it home, personal, or auto — consists of EMIs (equated monthly instalments), which in turn, consist of the interest and the principal component. The loan prepayment facility offered by all lenders allows a person to repay their loan in part or full before the end of the availed loan tenor.
By prepaying a housing loan, the borrower reduces his or her burden by reducing the outstanding principal amount, which in turn, leads to reduced EMI or tenor on the balance loan amount. However, before signing any loan agreement, borrowers must check with their lender the terms for prepayment of loan as the conditions towards this facility differ from bank to bank. Now, let us understand the prepayment process for housing loans further.
How to Prepay Home Loan?
To prepay a home loan, first, you must first assess your financial capability and current liabilities. With the help of a home loan EMI calculator, this step can be performed with utmost ease. Any potential applicant can check their monthly EMIs and decide on when to part/fully foreclose a home loan. When there are surplus funds available with an individual and multiple loans are running, then one must prepay their loans — either the one with the highest interest rate or the one with a longer tenor to reduce the interest cost on the loan amount.
As per RBI guidelines, banks cannot charge prepayment fees on home loans opted on floating rates of interest. However, one needs to keep in mind that the bank levies a certain fee on part or full prepayment of fixed interest housing loans. The charges differ from bank to bank.
- For part or full prepayment of home loan, one needs to get in touch with the bank and convey the details of prepayment.
- The borrower must pay the bank a charge for prepayment of the home loan. Usually, the fee varies from 2% – 4% of the outstanding loan amount at the time of prepayment.
- For part prepayment, the required amount that needs to be paid to the bank should be equivalent to at least a minimum of three months’ EMIs. The prepayment should be made only after paying the initial few EMIs as per bank conditions. Also, check for any lock-in period.
- The borrower must submit the required documents to the bank to support prepayment, alongside providing identity proofs.
- On full prepayment, remember to collect all the property documents from the bank that were submitted initially.
- An acknowledgement letter having details of prepayment and outstanding amount, if any, must be obtained from the bank after making a prepayment.
- The borrower must remember to collect all the unused post-dated cheques from the bank at the time of foreclosure of the home loan to avoid any later misuse.
Home Loan Prepayment Calculator
The home loan prepayment calculator helps to assess the impact of part or full prepayment on the loan amount. With the help of these calculators, one can easily know the exact EMIs to be paid on the balance outstanding loan post partial prepayment.
With the help of a home loan prepayment calculator, one can find out exactly the interest that can be saved when going for a prepayment plan. Going for a part prepayment is good only if the interest amount saved is higher than the bank charges levied on prepayment. While going for the prepayment plan, the borrower must decide whether to reduce the EMI amount while keeping the same tenor or by increasing the EMI amount.
Details required for the prepayment calculator are:
- Loan amount
- Loan tenor (in months)
- Rate of Interest
- The amount of part prepayment
For example,
Suman has taken a home loan from her bank as per below,
| Description | Loan details |
| Loan amount | 30,00,000 |
| Interest rate | 8% |
| Tenor | 240 months |
| EMI | 25,093 |
| Total interest amount (in 20 years) | 30,22,368 |
| Total amount payable (in 20 years) | 60,22,368 |
Suppose Suman decides to make a part payment for Rs.10,00,000, by filling in all the above details in the online home loan prepayment EMI calculator, she will now see two options.
- Savings in terms of EMI
Suman will see the reduced EMI of Rs. 16,729, if she decides to make a part prepayment worth Rs.10 lakh, which translates to savings of Rs. 8,364 in EMI a month.
- Reduced Tenor
The results in the calculator also showing the reduced tenor period of 115 months.
Prepayment is an excellent way to reduce one’s loan burden and get out of the loan early. Thus, borrowers must opt for prepayments whenever possible.
