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Part Payment on Home loan - Uses and Benefits

Updated: Mar 09, 2022
Part-Payment-on-Home-loan-Uses-and-Benefits

Nothing can beat the feeling of pride and joy when you become the owner of your first home. Most first time homeowners have to depend on home loans to make this dream a reality. And then comes dealing with those monthly installment payments. Due to their longer tenures, most home loan borrowers find themselves feeling exhausted with the burden of monthly EMIs, for 2-3 decades, at times. All home loans come with a long term commitment for the borrower. During this time, one has to be very careful with their monthly budget, and needs to rethink every extra expense. Other desires such as buying an expensive gadget or car often has to be put on the backburner. Thus, it is very natural to feel inclined to give into these desires if you had access to additional funds such as yearly bonuses. On the other hand, using such funds for making part payments towards the home loan would certainly give you more financial flexibility.

How is Part Payment Different from Prepayment?

When the borrower makes a part payment on a home loan, he or she chooses to pay a certain amount towards the principle that is not equivalent to the total outstanding loan amount. This typically happens when the borrower has access to a lump sum of money such as bonus payments, increments or incentives from salary, dividends on investments, and so on.

Prepayment, on the other hand, is different from part payment. When the borrower opts to pay off the entire outstanding home loan amount in one shot prior to the close of the last repayment date of his or her payment tenure is known as prepayment or foreclosure of the home loan.

Planning Part Payments of your Home Loan

Now that you know the difference between part paying and prepaying your home loan, it is also important to understand if using extra funds to make part payments makes any sense at all. After all, the EMI calculator helped plan out your finances for the next few years so that the monthly instalment would not put an additional burden on your pocket.

If your goal is to pay off your home loan quickly then partpaying it is a logical decision to make. This can minimise your home loan liability to a significant extent whilst not impacting your budget for regular monthly expenses in any way.

Using our home loan calculator, you can check the amortization schedule of your loan and then use it to estimate the effect of part-payments.

Benefits of Home Loan Part Payments

Part payment benefits on your home loan far outweigh the negatives. Take a look.

Provides Additional Liquidity: With access to financial windfalls like an inheritance, performance bonus or a gift is the right instrument to use towards part payment of your home loan. This provides more liquidity to your finances.

More Wealth Accumulation: If the rate of interest on your home loan is greater than the funds that you have invested in various financial instruments, considering part payment of your home loan is a smart move. If you are happy to feed your risk appetite, then you have the option of diverting your left-over funds towards financial instruments that offer potentially higher returns in the long run. All of this adds to your effort of financial planning and wealth accumulation.

Maintain A Positive Credit Score: If you have availed of the home loan on a floating rate of interest, there is the possibility of the interest being hiked as a result of ongoing revisions by the RBI and subsequently, the lending partner. Under such circumstances, your loan EMI may increase or the tenure. Part payments on your home loan in such situations ensure that you maintain a low interest rate on your home loan and a positive credit rating.

Become Debt Free Quickly: During the first few years of your home loan payments, a majority portion goes towards paying off the interest component. This reverses as you move closer towards paying off your loan fully where the larger part of the EMI goes towards paying the principal component of the home loan. Making substantial part payments on the home loan during these initial years of your repayment tenure helps cut down on the interest payments considerably. Your tenure of repayment reduces automatically which means that you become debt free that much sooner.

The Convenience of Payment: Part payment on home loans is a boon for anyone who does not wish to enter into a structured form of pre-payment approach that works on a predefined schedule. If your lending partner allows ad hoc payments without any penalty fee or charges, then the convenience of paying large sums towards your home can definitely work in your favour.

Home Loan Part Payment Charges

As per the current guidelines of the Reserve Bank of India, lenders cannot levy a penalty fee on home loan part payments if it has been availed at a floating rate of interest.

Having said that, the terms and conditions may vary from lender to lender. Therefore, it is best to speak to your lending partner to get the most accurate information.

In Conclusion

As the old saying goes, ‘one should borrow as little as possible and repay as quickly as possible’ holds true for home loans that come with long repayment tenures. If you have come upon extra income that can be used to make a part payment on your home loan, then you should definitely give it a go.

If you have an existing home loan with Grihashakti and wish to make part payment towards it, be sure to call on the toll free number 1800 102 1003 between 9.30 a.m. to 6.30 p.m., Monday to Saturday to get more information.

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