Gathering the funds to buy the property you want is easy, provided you match your chosen lender’s eligibility expectations and document requirements. Even that aspect of the home loan borrowing journey is not too difficult with so many online calculator tools at your disposal.
Once your home loan application is approved, you gain access to a sizeable sanction amount and enjoy the privilege of repaying the amount over a tenor that is comfortable and practical.
However, while repaying the amount through EMIs is a reliable repayment plan, there are other measures one can take to reduce their total interest outgo. The repayment amount is composed of the principal amount and the interest accrued over it through the course of your repayment tenor – making it a considerably large sum to pay back. It may place some strain on your finances or even compromise your future financial goals.
By prepaying parts of your home loan or even foreclosing your loan amount, you stand to save a sizeable chunk as interest. In this article, we talk about the various aspects of making part-prepayments, and other ways to curtain your interest outflow.
Repayment Options on Your Home Loan
If you find yourself with surplus income and have an ongoing home loan, consider putting down some of the money as an additional payment toward your home loan above your EMI. In fact, if your financials allow it, you have two prepayment options to choose from:
- Part-Prepayment: Through this facility, you can pay back a part of your outstanding loan balance alongside your scheduled EMIs. Most lenders allow borrowers to make part-prepayments after they pay at least one EMI toward their repayment amount. The prepayment amount usually has to be equal to the value of one EMI, and if you are an individual borrower with a floating interest home loan, you can make these payments without any additional fee or penalty.
- Foreclosure: When you choose to foreclose your home loan account, you essentially pay back the entire remaining loan balance in one go, instead of parts. To be able to do this, your repayment schedule must be at least one EMI in, and you can enjoy these privileges at no extra cost if you are an individual borrower with a home loan linked to a floating interest rate.
Reasons to Prepay Your Home Loan Amount
When you opt to make part-prepayments, or even foreclose your ongoing Home Loan, here are the benefits in store for you:
- Limited Interest Outflow
The interest on your home loan compounds every month, and your final repayment amount comprises the original loan amount you borrowed and the interest that accumulates over it over the time it took you to repay the loan amount. When you make part-prepayments, or foreclose your loan, you either reduce the loan amount remaining or pay it off before the end of your repayment tenor – saving substantially on the interest component.
- Relieves Repayment Bandwidth
Home loan EMIs are sizeable monthly obligations that can use up your repayment capacity, leaving you with limited options for other investments and financial commitments. If you reduce your repayment amount by making part-prepayments, you free up your repayment capacity to take on other obligations to build your wealth or provide for your family.
- Zero Additional Costs
Individual borrowers with floating interest rate home loans stand to save more, as lenders typically do not levy any fee or penalty charges on making part-prepayments or foreclosure of the home loans. The facility is available after making at least one EMI payment from the repayment schedule, and in the case of prepayments, the amount should be equal to the value of at least one EMI. Using an home loan emi calculator you can check your EMI prepayment schedule in advance.
However, borrowers keen on claiming tax exemptions on their home loan repayment may be at a disadvantage if they prepay their home loan amount. That being said, the benefits of closing the repayment amount earlier may outweigh the tax implications of the transaction. Borrowers are advised to consider all financial aspects before they arrive at a conclusion.
Part-prepayments or loan foreclosure serves well for those who want to save on their total cost of borrowing a home loan and would like to redirect their funds towards other investments. Consider these options if you have the funds handy and can spare them towards your home loan over the EMIs you already pay.