Home Loan Prepayment

I am a 26-year-old man, working in an MNC in Chennai. Last year I decided to buy a home for myself. Buying a home was my biggest dream and thanks to the lofty home loan policies that banks and HFCs are offering these days. I managed to buy a 2 BHK. Well, I succeeded in managing to bag loan from one of the government banks and got it at a reasonable interest rate.

Now, I am a satisfied person and secured that few years down the line, I will own my house. But one thing that always boggled my mind was if I wish to prepay my loan then what is the nitty-gritty associated with it. Since I work in private sector, I don’t have much time to run around the bank to fulfill the formalities and the paperwork.

Then, one of my friends suggested to go through LoanYantra, an online loan management company. Well, my association with LoanYantra proved to be a successful one and they gave great tips which definitely cleared the air that surrounded the idea of home loan prepayment. For many to avoid the hassle of running behind the banks, here I am sharing my knowledge of Home Loan Prepayment.

What is Home Loan Prepayment?

Home Loan Prepayment is paying an additional amount to the outstanding principal of the loan amount while you are in the Home Loan tenure. This additional amount is over and above the regular EMIs. This helps in reducing the principal outstanding which in return helps in reducing your EMIs and/or your home loan tenure.

It might sound easy but there is a slight catch. Banks typically levy a prepayment charge of about 2 – 3% of the outstanding loan amount. This amount is charged if you are repaying above a certain amount or you are switching your bank. Although most of the banks don’t charge extra. Thus, it’s advisable that you enquire while you apply for your home loan about the prepayment charges as well.

What You Should Know About Home Loan Prepayment 

Home Loan Prepayment can be a bit tricky as some lenders include extra fees.  In case of home loan, banks borrow funds based on the commitment for long period, these funds have to be re-assigned through credit channels for which bank has to pay additional cost. Thus, banks discourage the process of prepayment by leving an extra charge on the outstanding loan amount.

To Prepay the Home Loan, it is advisable for the concerned person to attend. If not possible,the authorized person needs to carry a letter which says that the respective person is authorized by the lender to repay the loan.

Note : RBI and the NHB have abolished penalty on home loan prepayment (home loans with flexible interest rate). So banks usually do not levy extra fess. But conditions apply.

Home Loan Prepayment Vs Tenure and EMI.

Home Loan Prepayment reduces the outstanding principal amount. So, this inturn reduces your EMI or tenure. It is always wise to calculate and choose.

Loanyantra’s Tip : It is better to reduce the tenure and keep the EMI constant. When you have an increment in the salary, you can increase the EMI which will reduce the tenure even further.

Do’s ad Don’t’s of Home Loan Prepayment:

  • Carry your ID proof (Aadhar is the most preferred one).
  • Carry your chequebook in case you need extra.
  • Also remember to mention your name, account number, home loan account number behind the cheque when you issue.
  • Collect all your previous cheques if you wish to change your EMI.
  • A proof of source of funds for your Home Loan Prepayment.
  • Make sure that you update your CIBIL database after home loan prepayment as it helps in reducing the outstanding balance and also helps in improving your credit score.
Home Loan Prepayment charges of some of the popular banks and HFCs
Banks and HFCs associated with Loan Yantra Home Loan Prepayment Charges
SBI ZERO
ICICI ZERO
IDBI Not more than one prepayment in a month
DHFL 3% + Service Tax
Indiabulls ZERO
Axis Floating Rate Loan: Nil

Fixed Rate Loan: 2% of outstanding principal/amount prepaid

CITI ZERO

Words of Wisdom –

LoanYantra is committed to making a difference in the approach towards availing home loan and paying it back. We are known fro absolute customer satisfaction and we work on it continuously. Stay connected with us on www.loanyantra.com and get a planned calender, timely alerts and valuable suggestions on Prepayment of your Home Loan.

Advantages of Prepayment or Part Payment – We name it, The Holiday Plan

To prepay the entire amount early in the tenure or in the later stages is always the best suggestion as you can enjoy the advantages of early closure of your loan, either home or personal.

Prepayment of entire amount might be a bit tricky, part payments can be planned, though. So if we work out on this, we get really a fair picture how advantageous it really is.

Recently RBI had directed banks to stop charging customers for prepayments. Definitely this is one greatest advantage to consider. It is the surely recommended option for personal loans, if you have lump sum money sitting idle.

For instance, if you have a Rs.3,00,000 loan amount taken from next month for 5 years at the rate of 17.5%. Suppose, you wish to pay the outstanding amount, let us see the table of calculations to know the extra amount you can avoid paying.

Year Principal (P)       in Rs. Interest (I)    in Rs. Total Payment (P)+(I) in Rs. Loan paid till date in % Outstanding amount (O) in Rs. Save if you wish to prepay amount O in Rs.
2016 33,774 41,592 75,367 11.26% 2,66,226
2017 47,544 42,896 90,440 27.11% 2,18,681 3,76,833
2018 56,566 33,874 90,440 45.96% 1,62,116 2,86,293
2019 67,298 23,142 90,440 63.39% 94,818 1,95,953
2020 80,068 10,372 90,440 95.08% 14,750 1,05,513
2021 14,750 323 15,073 100% 0 90,440
Total 4,52,200

Consider another illustration with a home loan of Rs. 30,00,000 for 12 years at the rate of 9.5%. Assuming part payment Rs.20,000 will be paid quarterly. Now, look at the table which shows your savings.

Note : Part payment paid anytime will reduce your principal amount.

Loan will close in Total Amount Saved Total EMIs Saved By Paying Number of Part-Payments Total Part-Payment Amount
108 months (Earlier 144 months) Rs.12,59,676/- 36 months Rs.20,000/- each. 35 months Rs.7,00,000/-

Yes, it is no exaggeration.
Save as and when you can without compromising on basic needs apart payment_loanyantrand amenities. Try to part pay your loan at least annually. And see how it works.

To decide which loan to close earlier, ultimately, is an economical trick. If the idle cash in hand earns you less return when kept in a bank or invested elsewhere when compared to the interest you pay on your loan, it is wiser to pay off the loan.

Pay fast and enjoy investing again or plan a holiday with your family.

 

 

*Both the instances are under the assumption of interest rates being constant