Home loan prepayment means paying a certain part or full amount of your loan before its tenure
After the latest increase in the repo rate by 25 basis points (bps) on February 8 by the Reserve Bank of India (RBI), the misery of home loan borrowers is set to get worse. Equated Monthly Installment (EMI) which has already increased significantly from May 2022 onwards, will increase further as banks have started increasing lending rates. With many borrowers likely to feel uncomfortable with such a hike in EMIs, the question is, does it make sense to prepay the loan?
What is home loan prepayment?
In simple words, home loan prepayment means paying a certain part or full amount of your loan before its tenure. The benefits of prepayment are that they reduce your EMI burden or reduce the loan tenure.
Siddharth Maurya, resource specialist, specializing in real-estate and fund management, points out that when a house loan is taken for the first time, the interest component is high, but it gradually reduces with the passage of time. When you prepay your mortgage, the money goes into paying off the principle of the loan.
“The principal balance of the outstanding home loan will be used to calculate the interest for the subsequent month. You can significantly reduce the interest component of the mortgage if you prepay it. Faster principle repayment enables you to pay off your mortgage quicker," said Maurya.
When to opt for home loan repayment
Archit Gupta, Founder and CEO, Clear said that if the borrower has extra cash, the first thing they should do is try and pre-pay their loan as much as possible and in a small amount every year. Should keep doing this. ,
He said that this gradually reduces the interest burden and the loan can be repaid earlier, reducing the overall interest outlay.
As a result of your prepayment, your loan is paid off sooner than you expect. Therefore, prepayment can be a useful feature that customers may not be aware of or may not have considered while choosing them. Maurya pointed out that this is an ideal option as regular micro prepayments are automatically deducted from your bank account.
prepay work
Suppose you have taken a loan of ₹20 lakh at 7.5% interest rate for a tenure of 20 years. While your monthly EMI is ₹16,111. You pay ₹38.7L at the end of 20 years, directed that your interest cost on a loan of ₹20L comes to approximately ₹18.7L. If we look at this example, it is twice the amount originally charged to the payer.
Suppose you have taken a home loan of ₹25 lakh for a tenure of 20 years at an interest rate of 8%. Your home loan EMI comes to ₹20,911. Paying a lump sum amount of ₹5 lakh after 12 months saves an interest of over ₹12 lakh.
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