Home » News » Real Estate
Source: Personalfn.com

Home loan: To prepay or not to prepay?

As in any interest rate scenario, many people who have home loans are considering whether or not it is recommended to prepay their home loans so as to incur lower EMI payments going forward.

By Personal FN

As in any interest rate scenario, many people who have home loans are considering whether or not it is recommended to prepay their home loans so as to incur lower EMI payments going forward.

But before rushing into the decision, there are a few things to look into when considering home loan prepayment, and these are explained below:

1. Prepayment & Interest Savings

First, what is prepayment? Prepayment is when you decide to pay an additional (over and above your regular EMIs) amount of principal of your loan back, ahead of time. This reduces the principal outstanding, which in turn reduces your EMIs or your remaining loan tenure.

Banks typically levy a prepayment charge of about 2 - 3% of the outstanding loan amount, if you prepay above a certain amount, or if you are switching lenders. However as per recent NHB notification, this has been disallowed going forward. There are still some loans on which prepayment charges apply, so be sure to check with your lender.

At the very least, most banks will allow part prepayment up to a certain limit without levying on you any prepayment charge.
In some cases like with SBI, if the prepayment is out of your own income and not borrowed money, you can prepay any amount without incurring any penalty. You can opt to partly prepay your loan regularly, for example every 3 months, constantly reducing your principal outstanding, bringing down the amount of interest you will owe the bank. Remember, the longer the tenure of the loan, the more the interest you are paying, so part prepayments are a good way of saving on interest payments.

An illustration will help explain the point:

Our favourite fictional character, Mr. Shah has taken a loan 5 years ago, and wants to reduce his debt burden by making part prepayments.

Initial Loan Taken Rs. 20 lakh
Tenure of Loan 20 years
Loan tenure elapsed 5 years
Current EMI Rs. 22,022
Current interest rate 12% p.a.

 

 

 

 

 

If Mr. Shah were to continue with his EMIs, he would repay the following amounts:

Total interest payment (nominal value) Rs. 21.29 lakhs
Total Principal Repaid (outstanding principal) Rs. 18.35 lakhs

 

 

 

 

(These figures can be arrived at from the amortization table in his loan policy document which his bank has to provide to him.)

Thus, his Rs. 20 lakh loan would cost him approximately Rs. 40 lakh over 20 years, assuming a constant interest rate of 12% for the sake of calculations.
Understandably, Mr. Shah wants to reduce the debt burden.

He can save enough through the year by cutting down his expenses and channelizing his bonus towards home loan prepayments, to pay an additional 3 EMIs every year.

If he does so his payments come down to:

Total interest payment (nominal value) Rs. 12.03 lakhs
Total Principal Repaid (outstanding principal) Rs. 18.35 lakhs

 

 

 

 

He saves approximately Rs. 9 lakhs in interest payments - Certainly a tidy sum!

Also remember, any prepayments towards home loan will be considered for tax benefit under Section 80C as they are repayment of principal of the home loan - an added benefit!

Additionally, by doing so, he would not incur any prepayment penalty as this is below the maximum penalty incurring limit levied by his bank, and he can reduce his loan tenure by close to 6 years. He can repay his total loan in approximately 14 years instead of 20.

1 2

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    Please suggest a good investment option of land in South India. I want to buy a land parcel of around 2 acres.

    A

    If you take a look at the South Indian real estate market, Bangalore has emerged as a clear winner. Due to the strong presence of IT/ITeS an...

  • Q

    I want to invest Rs 20000 per month. I have identified Reliance Small Cap Fund and DSPBR Micro cap fund for investment. I can hold to investments for two years. Is it a good idea to invest in these schemes? How much returns I will be getting?

    A

    If you are an aggressive investor, you can consider investing in either of the 2 funds.DSPBR Micro Cap My suggestion is that if you are inve...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    I am 36 years old and work in private company. so how can I manage my retirement planning...

    A

    Start with how much you would need monthly today, inflate the numbers and we can work on a corpus and then work on investing monthly towards...

  • Q

    Suggest couple of equity mutual funds for me. I am keen to invest Rs 25000 per month for next couple of years. I can remain invested for at least five years?

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    I am a senior citizen.I received interest of Rs .1,70,000/- on FD.I have duly filled 15G form.I have NO other source of income.Have I to pay Income tax on this interest or can it be excempted?

    A

    Sir, please note if you are less than 80 years but more than 60 years of age, your total income upto Rs 3,00,000 is exempt from tax, you are...

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.