Home Loan Prepayment: Calculator, Charges and How to do it Faster?
A solution to reduce your debt burden is prepaying your home loan. Home loan prepayment is where you repay your loan in part or in full before the completion of the loan tenure. By doing so, you can save substantially on the total interest payable and boost your credit score. If there is any surplus amount, eligible borrowers can utilise it to prepay their home loans. But, what is the eligibility to prepay your loan amount? Is there a prepayment penalty? Read on to know all the details about home loan prepayment.
Home Loan Prepayment Eligibility
All home loan borrowers can choose to prepay their home loans provided their lending institution offers this facility on their chosen loan product. Enquire about the prepayment option while applying for a home loan.
Note: A few lenders may allow individuals to make a specific number of prepayments per year following the completion of a pre-specified lock-in period. Also, borrowers may need to bear nominal charges when prepaying their home loans.
Also read: How To Choose Banks/NBFCs For Home Loans?
Home Loan Prepayment Charges & Rules
According to the RBI guidelines, financial institutions can impose prepayment charges only on the outstanding loan amount. Usually, the prepayment charge ranges from 2% to 3%.
Here are the various situations when banks and Housing financing Companies (HFCs) can levy prepayment charges in relation to a home loan:
- When non-individuals, for example, companies, opt for a home loan, they have to bear prepayment charges.
- Financial institutions may charge a prepayment penalty if borrowers choose to foreclose a dual-rate home loan.
- Prepayment charges will be applicable if one borrows money from a lending institution to prepay a fixed rate home loan.
In 2014, RBI issued a circular that stated the rules in relation to home loan prepayment. As per the regulation, banks, and housing finance companies (HFCs), will not be able to impose prepayment charges in these scenarios:
- A borrower has availed of a home loan against a floating rate of interest.
- Individuals have opted for a fixed interest rate on their home loan, and they are prepaying the payable amount from their own sources.
- A borrower makes partial prepayment when switching to a floating interest rate regime.
How To Prepay Home Loan Faster?
Borrowers can pay the outstanding amount in full before their tenure is completed, or opt for partial prepayment of the home loan during the course of the loan. A combination of both is also possible. Listed below are a few best ways you can prepay your home loan:
1. Make a down payment of 20% or above
Paying a certain sum of money as a down payment against your loan reduces your debt burden significantly. With a lower debt burden, your interest rate will be lower. Also, your overall prepayment amount will get reduced.
But how much should be the down payment percentage? You can consider paying 20%-30% of your loan amount as a down payment. However, consider your financial situation before making that commitment.
2. Prepay a fixed amount
Every year, individuals can pay a fixed amount towards the principal. However, this amount has to be more than the EMI value.
3. Pay higher EMIs
Borrowers can reduce their debt burden considerably by paying over and above the calculated home loan EMI every month. For instance, if an individual chooses to increase his/her EMIs by Rs. 5000 per month, on a home loan of Rs. 20 lakh, after the 11th year of repayment, he/she can save up to Rs. 2.4 lakh on total interest payment. The loan payment tenure, in this way, will also get reduced by about 36 months.
4. Gradually increase the prepayment amount
Another way to reduce the loan burden is to start by paying a small sum as a prepayment and gradually increasing the amount each year at a fixed rate.
5. Make full repayment
In case individuals have surplus funds at their disposal, they can pay the entire outstanding amount before the tenure ends. This will be known as loan foreclosure.
Home loan providers may impose charges for prepaying the full amount. Take note of the specific charges imposed by lenders before proceeding. Apart from prepayment charges, borrowers must also take note of the interest rates applicable on home loans.
For instance, Navi offers home loans starting at an interest rate of 7.39% p.a. Download the Navi App to apply, and turn your dream of owning a home into a reality.
What is a Home Loan Prepayment Calculator?
A prepayment calculator helps you ease all your prepayment options. A home loan prepayment calculator lets you calculate how much you might save on interest and how much it will affect your EMI in case you decide to foreclose your home loan. All you need to do is enter the loan amount, tenure, rate of interest, instalments paid, and prepayment amount to see the results.
How To Use A Home Loan Prepayment Calculator?
Individuals can use a home loan prepayment calculator to compute how much they can save by prepaying their home loans partially/fully. They’ll have to enter the following details:
- Loan amount
- Interest rate
- Tenure (in months)
- Prepayment amount
After entering the values of the above-mentioned particulars, one can determine these three vital aspects.
- Revised instalment amount
- Savings on EMI
- Revised tenure
Example:
Let’s say you have a loan of Rs.20 lakh
Tenure – 20 years
Interest Rate – 10% p.a.
Using an EMI calculator, you will see that your EMI is Rs.19,300.
Now let’s say you prepay Rs.5 lakh at the end of 15 years. You would be saving around Rs. 2,06,867 on interest with the tenure reduced by 3 years or 36 months.
Also Read: How To Compare Home Loans With A Home Loan EMI Calculator
Home Loan Prepayment Rules and Regulations
In 2014, RBI issued a circular for banks regarding certain prepayment rules. Since then HFCs (Housing Finance Companies) have followed suit, abiding by the loan prepayment-specific rules as set by the Reserve Bank of India. Here are the guidelines:
1. Banks and HFCs can charge a prepayment penalty fee:
- If you are a non-individual borrower
- If you’re prepaying a fixed-rate loan
- If you’re taking a loan from another bank of HFC to prepay your loan
- For dual-rate loans, where the initial rate was fixed, banks can levy a prepayment fee if the prepayment is made for a fixed-rate loan
2. Banks and HFCs cannot charge a prepayment penalty:
- If you are making prepayment towards a floating rate loan
- If you are making full repayment from your own pocket toward fixed rate loans
- For dual-rate loans, banks cannot levy a prepayment fee if the prepayment is made for a floating rate loan.
What is Foreclosure Month?
It is the month in the loan repayment period when you completely repay the full loan amount in advance. For example – If your loan tenure is for 6 years (72 months), and you decide to make a full prepayment by 4 years and 6 months (54 months), then your foreclosure month will be the 54th month.
What is the Interest Amount Saved on A Foreclosure?
Banking institutions normally charge 1% – 4% on the payable amount as foreclosure charges. Certain loan providers do not charge this amount as well. Check these charges before applying for a loan.
Things to Consider Before Making Home Loan Prepayment
- Your age: If you’re nearing retirement, it’s advised to prepay your loan before you retire. You might have little source of income post-retirement and repaying your loan without a stable income can be quite difficult if you don’t have sufficient funds in your account.
- Investment options: If you find that investing your money would give you better returns than the amount you will save by prepaying your loan, then you could go with the former. Investing your amount in the right investment channels could get you better returns in the future instead of utilising the amount to prepay your loan.
- Your financial plans: Prepaying a home loan much earlier than the scheduled tenure might require a significant amount. This could drain out your savings. So, take a call based on your financial standing and future plans before using your hard-earned money in prepaying the loan.
- Tax benefits: As per the Income Tax Act, 1961, you can claim tax exemption of up to Rs 1.5 lakh per year on principal amount repayment under Section 80C. Other than that, you can also claim up to Rs. 2 lakh exemption on interest paid under Section 24(b). Additionally, in the Union Budget 2021-22, the Finance Minister announced a further deduction of Rs 1.5 lakh on interest (over and above Rs 2 lakh allowed under 24b) under Section 80EEA. Once you prepay your home loan, you won’t be able to enjoy home loan tax benefits.
Final Word
Home loan prepayment depends on factors such as the interest rate, prepayment charges, tenure of the loan and availability of funds. However, prepaying a home loan is an excellent way to cut down on interest payable, boost your CIBIL score and become debt-free sooner. But you must take note of the charges incurred during prepayment. You must carefully consider these factors and future financial goals before deciding on home loan prepayment.
FAQs On Home Loan Prepayment
Ans: The minimum part payment amount is generally equal to the EMI amount that a home loan borrower has to pay. However, there may be additional riders according to the loan’s terms and conditions.
Ans: Yes, you can use the balance transfer facility to reduce the total payable amount.
Ans: Home loan prepayment charges depend on whether you have taken a fixed rate or a floating rate loan. For floating rate loans, banks don’t levy any prepayment fee unless you’re taking a loan from another HFC to prepay your loan. For fixed-rate loans, banks and HFCs have the right to impose a prepayment fee. The fee is based on the principal outstanding.
Ans: This may vary from lender to lender. Some lenders allow part prepayments with terms and conditions while some lenders don’t. Check with your lender to understand if you’re allowed to do part prepayments against your home loan.
Ans: Repaying the entire loan is known as home loan repayment. On the other hand, partly repaying the outstanding amount is known as prepayment.
Ans: Any borrower planning for a home loan is eligible to avail of this facility. However, you will have to check with your bank if the loan prepayment facility is on offer while applying for this loan.
Ans: Foreclosing a loan will have charges levied. If this penalty exceeds your interest saved on the loan, then it does not make sense to pre-close or foreclose any loan.
Ans: A few other ways to reduce the home loan repayment burden are to opt for a higher down payment at the very outset, avail of balance transfer facilities or even foreclose the loan if convenient.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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