A home loan is generally taken for a period of 20 to 30 years. A borrower has to pay huge interest on the home loan taken. But this interest rate can be reduced if you avail of the prepayment facility offered by banks and housing finance companies (HFCs). Lenders give the prepayment facility to the borrowers with which they can make part or full prepayment before the fixed tenure chosen by them expires. This helps borrowers in reducing both the principal and interest outstanding amount over the duration of the home loan. 

How Does The Home Loan Prepayment Facility Work? 

  • When an individual wants to save the interest payable over the duration of the loan and reduce the overall burden, he opts for a prepayment facility.
  • A person can pay an extra amount of principal over and above his/her regular EMI amount at different periods in his/her tenure. 
  • When an individual pays an extra amount at any time during the course of the loan, the outstanding amount will automatically decrease. Due to this, your EMI or your loan duration will also decrease. 
  • When choosing to prepay the home loan, it is important to consider the prepayment charges. 
  • Lenders don’t charge on the prepayment if the home loan is taken on a floating rate of interest. But, if the loan is taken at a fixed rate of interest and the borrower wants to repay the loan by taking another loan, then the prepayment charges vary from 2% to 3% of the amount being prepaid. However, the borrower is not required to pay charges if he/she uses their own funds to prepay. 
  • It is always good to make a prepayment in the initial years of your tenure. This is because, during these years, the interest rate will be higher in the initial years and will gradually come down as the years go by. So, to save on the interest amount, it is better for the individual to prepay in the initial years. 

Home Loan Partial Prepayment 

  • You can use any bonuses, inheritance, or financial gifts that you get to part prepay your home loan.  
  • Due to interest rate revisions or a considerable drop in the borrower’s credit score during the duration of the loan, it is better to make as many part-prepayments as possible when the interest rates applicable are low and your credit score is high. 
  • It is also a good idea to prepay your home loan when its interest rate is higher than the return you may get on that amount if deposited in investments that are in sync with your risk appetite and liquidity requirements.
  • During the initial years of your loan,  a larger portion of your EMI goes towards servicing the interest whereas only a small part is adjusted from the principal. But, in the later years of your loan, a major portion of the EMI is adjusted to lower the outstanding principal. So, you should consider making considerable part-prepayments during the starting years of your home loan. This will not only help you to save the interest outflow but also help you to cut down your loan tenure and become debt-free quickly. 

Also Read : 6 Smart Ways to Prepay Home Loan