What is Home loan prepayment? What are the Benefits and Limitations of Home Loan Prepayment?

In home loans, towards the beginning of the tenure, the interest cost is the major component of home loan EMIs because of the large principal amount and long repayment tenures. Depending on the tenure, the interest cost can sometimes go up to 40-50% or even more of the total home loan amount.

So as to reduce the overall interest burden, you can either choose partial or full home loan prepayment. It not only helps you to save big on interest costs but also lowers the homeownership cost.

In this blog article, we will learn about the concept of home loan prepayments in detail and the things you should know, before availing of the option.

What is Home Loan Prepayment?

Home loan prepayment is a way to fully repay the outstanding principal amount before the completion of the home loan tenure. The prepayment can be done in parts or full, depending on your financial capability and scenario.

Let’s check an example of how home loan prepayment works:

Home loan amount: Rs 25 lakh
Rate of interest rate: 8.99%
Repayment tenure: 15 years
EMI amount: Rs 25,342
Total interest amount payable: Rs 20,61,522

Let’s assume, you decided to prepay the outstanding loan amount in full at the end of the 10th year. Therefore, you have to make a payment of Rs 12,21,085 to settle the home loan account. In the process, you will save approximately Rs 3 lakh on interest costs.

Alternatively, if you decide to pay additional Rs 3,000 with the EMI amount, by Rs 3,000 every month, after the 2nd year, you will complete repaying the loan by the 14th year and save interest cost of approximately Rs 3.28 lakh.

Use our home loan EMI calculator to see your loan schedule and calculate the amount required for prepayment depending on the number of EMIs paid.

You can also go for home loan refinancing if you don’t have enough cash in hand to prepay the home loan amount.

How to Repay Home Loan through Refinancing?

Refinancing a home loan is a popular option to reduce the interest cost. In this option, you can refinance your existing home loan with another lender at a lower interest rate and attractive terms and conditions.

To refinance your home loan, you need to perform the following steps:

• Write a detailed application to the existing lender about the status of the loan
• Make sure you receive the NOC (no-objection certificate) from the lender for the prepayment and all official documents are returned
• Another NOC is required by your previous lender stating, both the lender and borrower have duly agreed to pay off the loan as per the prepayment clause

Home Loan Prepayment Rules

• Reserve Bank of India refrains lenders to charge prepayment penalties on floating interest rate loans taken to purchase property for non-business purposes. However, it is strongly recommended to check this with your lender.
• Check the prepayment rules and confirm with the lender beforehand of the necessary processes
• You must obtain a NOC or home loan account closure certificate stating you have paid all outstanding debt
• You must take back all the original property documents once you have paid the loan amount in full
• Submit all the relevant supporting documents while prepaying the home loan
• Take back all the unused cheque leaf from the lender to prevent misuse
• After the loan account is closed, request your lender to take the necessary steps so that it reflects on your credit history as soon as possible.

Pros and Cons Home Loan Preclosure

Pros

• Helps you to save significantly on interest cost, thus reduces homeownership cost
• Part prepayment helps to shorten the home loan repayment tenure
• Reduces your EMI amount and helps to make repayment faster
• Improves your CIBIL credit score and creditworthiness

Cons

• You will lose out on income tax benefits offered on home loan repayment
• You may need to pay a prepayment penalty, which can reduce the overall benefits
• It may affect your savings and financial stability because of the lump sum payments
• In the case of home loan refinancing, the process is very similar to taking a new loan and increases a lot of paperwork apart from regular documentation

How to calculate the financial benefits before prepaying a home loan?

Before making a home loan prepayment, you need to calculate, whether it is financially beneficial for you or not.

To calculate the real impact on your finances, first, you need to calculate the actual interest saving from prepayment. Then, calculate the interest you can earn by investing the lump sum amount in a fixed deposit.

Since the fixed deposit interest rate is lower compared to the home loan interest rate , the difference will be negative, meaning expenses. However, to calculate the actual benefit, you need to factor in the income tax savings from home loan repayments.

After considering all the factors, if the total interest saving is small, you should refrain from making prepayments.

Conclusion
Home loan preclosure is a big financial decision, and should not be taken in hurry. Consider all the factors and explore different options before making a decision.