Home Loan prepayment affects both the borrower and lender; that is the reason there is a prepayment penalty. A prepayment penalty is a fee or charges that you have to pay to the bank if you decide to repay a loan before the end of its term. As a borrower, you may choose to close your loan before time to reduce your borrowings and monthly interest burden. You may decide to repay the loan from your savings or by transferring your loan to another bank to get lower interest rates. Lenders charge fees on early repayment of home loans because some loans are designed to last a certain number of years and earn interest for the bank for that tenure such as a 30-year home loan. If you decide to close the loan before that specific period, the bank will have to bear the loss especially if the loan is a fixed-rate loan and interest rates are declining at the time of loan pre-closure. Home loan prepayment, on the other hand, is a great is of great advantage to the borrower. Prepayment saves a lot of money on the interest of the home loan and helps you get rid of the burden sooner. So the question comes that if you want to prepay your home loan then when and how can you prepay.
First, let’s look at when can we prepay our home loans:
The primary benefit of the prepayment of home loans is the reduction in the payment of interest. The interest component in the EMIs is highest during the initial stage of the home loan, i.e. the first set of installments has a significant chunk of interest in them. Therefore, the prepayment of loans is the most beneficial in the initial stage of the loan. The mid-to-late stage might not give you the great benefit of saving on interest, so in such cases, make sure that the amount of prepayment needs to big. It’s always better to go with a Home Loan Prepayment only when you have a surplus amount of money with you. At least three times the monthly EMI, because there is a charge attached to it. Prepayment should be made keeping all other expenses and savings in mind.
Now addressing the second part of how can you make the repayment of the home loan. Following are a few ways by which will help to prepay the home loan:
Depend on your Savings:
Taking a home loan is a huge commitment that lasts for a minimum of 10 to 20 years in a country like India. So, it will always be a good idea to save some additional money even after paying the EMI. On combining your savings for a period of a few months, you can use it to repay your home loan. Doing this will not only reduce your payable installment but can also reduce the tenure for your home loan.
Increase EMI & Reduce the Tenure
In case you are not able to accumulate funds through savings, you can still prepay the loan amount before the tenure. The simple solution to this is by increasing your monthly installments say EMI. Let’s take an example where Suppose Mr. A takes a home loan for ₹ 50-lakh for a tenure of 20 years- The EMI that he needs to pay ₹40,000 per month. Now if Mr. A continues to pay the same EMI for 20 years, he will end up paying a sum of around ₹ 50, 21,815 on interest. In this case, the total payable interest amount can be easily reduced just by increasing the payable amount towards EMI. Now if Mr. A pays ₹50,000 instead of paying 40,000, the loan will end soon, and a lot of savings could be made on the interest payable.
Set your Goals
While prepayment helps you get rid of the loan sooner and saves on your payable interest, you can’t afford to ignore the other goals that require your attention.
Keeping the prepayment in mind, you need to set your financial goals to achieve financial success. Setting your goals not only keeps you motivated but also helps you to plan better your finances and contingency funds. Most importantly, it enables you to make a more definite road map to achieve your targets.