Do you intend to pay off your home loan in advance? Everything you need to know about prepayment before making a decision
First Published Dec 14, 2022, 4:14 PM IST
SelfHome loans are one of the fastest ways to get a home. Although the criteria for each financial institution varies, the procedures for obtaining home loans are relatively simple and flexible. Borrowers of such loans also need to keep a close eye on their monthly repayments (EMI).
Meanwhile, the EMI for repayment of loans will be in fixed proportion to the amount and interest. Similarly, in home loans, the opportunity to repay before the specified period (prepayment option) is also allowed. So prepaying at least a portion of the loans will go a long way in mitigating the EMI liability. But customers should choose the timing of prepayment of loan carefully to get maximum benefit. Let’s elaborate on that.
Prepayment
Home loan prepayment refers to repaying a part of the loan earlier than previously agreed upon. Prepaying the fixed portion of the loan has many benefits such as reduced EMI liability, reduced loan repayment period or reduced debt burden, and saved money that would otherwise have been lost through interest.
When is more of an advantage
Most people take home loans for a tenure of 20 to 30 years. In long-term home loans, there is a very small proportion of the loan amount from the customer’s repayments in the initial stages. Most of the early repayments will be compounded in interest. Therefore, it is more beneficial for the customers to prepay the loan at the initial stage if they can.
Example
Suppose a housing loan of Rs 50 lakh is taken at 8% interest for 25 years. The monthly repayment or EMI will be Rs 38,591. Meanwhile, over a 25-year repayment period, Rs 65.80 lakhs will have to be paid as interest. The details of receiving EMI are given below.
- At the end of the first 5 years (1-5) only 7.7% of the loan amount is charged. The entire balance is added to the interest item.
- By the time the next 5 years (6-10) are over, only 19.2% of the repayment will have been added to the amount.
- At the end of 15 years repayment will be 36.4 percent of the original loan amount.
- Similarly, 61.9 percent is added to the amount from the completion of 20 years of EMI and 100 percent by the completion of 25 years.
Last Updated Dec 14, 2022, 4:14 PM IST
Download App:
