What does a Home Loan Prepayment Actually Mean?
Being in debt is never good as it can negatively impact your financial health. Talking about a home loan the prepayment facilities offered by lenders make it convenient to reduce the EMI burden making it in favour of borrowers.
By availing the home loan prepayment facility it helps borrowers to reduce the Interest burden which further helps to reduce the overall cost of your borrowing.
Basically, a home loan prepayment is repaying your home loan before the tenure period. It can be done in both ways either partially or completely. Hence, when you prepay your loan the EMI reduces. Instead of opting for reduced EMI you can also opt for a reduced tenure when going for a home loan prepayment.
When to Go for a Home Loan Prepayment?
It’s better to go with a Home Loan Prepayment only when you have a surplus amount of money with you.
For example – You can go for it when you receive your bonus or when any of your existing investments mature. The matter of fact is home loan is a long tenure loan and hence consumers need to pay a lot on its interest increasing the overall cost of borrowing. Hence, by repaying the loan early you can save the amount which you would have paid for interest.
Let us take an example to understand better – Suppose you take a home loan on an interest rate of 8.35 % and you availed 80% of property value as Home Loan which is 50 lakhs. Hence, at the end of tenure which is for 20 years, you will be paying 50lakhs + the interest which is equivalent to – ₹50,00,000 + ₹52,21,815 = ₹1,02,21,815.
So, when you prepay the loan with an amount of ₹2, 00,000 at the end of 36 months the amount you can save on interest is – ₹5, 75,170. Or else you can reduce the tenure by 18 months.
I think the calculation is enough to explain to you the power of prepayment.
How to Prepay your Home Loan?
Seeing the advantages of prepayment you must be wondering how can you go for it?
Well, it can be started with a small prepayment amount and can be increased gradually, doing this will help you observe the advantages and will motivate you for the future as well.
Taking a home loan is a big commitment which lasts for a minimum of 10 to 20 years in India. So, it will always be a good idea if you can save some on a normal basis after paying the EMI. On combining your savings for a few months you can use it to prepay towards your home loan. Doing this will not only reduce your payable EMI but can also reduce the tenure for your home loan. When this is done for more than once it can seriously do a lot to save your money.
Increase EMI & Reduce the Tenure
If you are unable to accumulate funds through savings, you can still prepay the loan before the tenure. Wondering how?
Well, this can be done easily by increasing your monthly instalments say EMI. Suppose a customer borrows ₹ 50-lakh for a tenure of 20 years- here he needs to pay ₹40,000 as an EMI amount. Now if he continues to pay the same EMI for 20 years, he will end up paying a sum of around ₹ 50, 21,815 on interest. Here the total payable interest amount can be reduced by increasing the monthly payable towards EMI. Now if the borrower pays ₹50,000 instead of paying 40,000 the loan will end soon and on the hand it will save a lot on the interest.
Set your Goals
While prepayment ensures peace of mind and saves on interest, you can’t afford to ignore other goals.
Keeping the prepayment in mind you need to set your financial goals in terms to achieve financial success. Setting your goals not only keeps you motivated but also reminds you of your mistakes. Most importantly it makes the road map clear for you to achieve your targets. Remember focusing only on prepayment is never a wise thing, focusing on other goals like retirement and children’s education makes a lot of sense and is important for your future.