Individuals who avail of home loans are obligated to pay back the borrowed sum in smaller monthly instalments over the course of their stipulated loan tenor. Borrowers may pay multiple EMIs at one go during this period if they have surplus cash at hand or even foreclose the loan. Prepaying the loan in full or in parts enables you to clear the loan sooner ahead of schedule. With this option, you can reduce the loan amount and subsequently the interest expense restricting the credit cost. Otherwise, you could be headed for a costlier loan as the interest piles up with the length of your tenor.
As per the Reserve Bank of India, lenders cannot levy prepayment or foreclosure fees on loans with floating rates. On fixed-rate loans, they may impose a penalty varying between 0.5% to 3% of the outstanding sum. A home loan prepayment calculator proves immensely beneficial, in this regard, since it paints an accurate picture of the EMI outflow allowing you to prepay loans at the opportune moment.
How to Use a Home Loan Prepayment Calculator
Borrowers can access a housing loan prepayment calculator to compute the balance EMIs and possible savings associated with prepaying an existing loan in full or in part before tenor completion. Just like any other type of loan calculator, this financial tool is simple to use and throws up precise results right away.
You need to enter the following data in order to use this calculator:\
- The amount of loan you are servicing
- The applicable rate of interest
- Your chosen repayment tenor
- The amount you wish to prepay
Just type in the required values or set the figures using a slider. Lenders allow free access to this financial tool on their respective websites for the convenience of users. Once you fill out all the fields, the house loan prepayment calculator will work out the answer in the blink of an eye.
Advantages of Using a Home Loan Prepayment Calculator
Individuals can ascertain various crucial loan aspects using a prepayment calculator:
- Potential EMI savings
- The modified tenor
- Updated instalment amount
Manual analysis of the revised EMIs and prepayment savings might be a lengthy, time-consuming affair with a propensity for errors. Employing a calculator, on the other hand, can be a handy implement in these circumstances. The calculator aids financial management and lowers the payable debt resulting from a decrease in the modified loan interest and EMIs due to prepayments. The minimum part prepayment amount is often equal to the EMI amount that a borrower has to pay, subject to the lender’s terms and conditions. The tool will indicate if you can prepay the loan and still possess adequate funds for your future needs.
Smart Tips for Home Loan Prepayment
Prepayment is a credit feature that grants considerable savings on your house loan. Here are some clever strategies for maximising the monetary benefits with efficient prepayments:
Opt for a Larger Down Payment
Try to make a higher down payment over and above the minimum requirement depending on your financial situation. This will reduce your debt load and interest rate bringing down the overall prepayment amount. Ideally, one should contemplate paying 20% to 30% of their loan amount as a down payment.
Consider Part Prepayments
Prepaying a modest portion of your housing loan can reduce the principal sum as well as the payable EMIs. Lower instalment amounts that are well within your budget may make timely repayments simpler.
Think About Shorter Tenors
Shorter tenors mean larger EMIs although you could pay the loan off earlier with a lower interest liability. Therefore, aim for higher EMIs, which should be in line with your income for optimised repayments. Clearing loans in shorter time spans can enhance your credit score.
Find a Lender Offering Attractive Interest Rates
When you apply for a housing loan, look for the lowest home loan interest rate. This will ensure timely payment of affordable EMIs that are easy on the pocket. If you have an existing house loan, consider a home loan balance transfer facility to limit the repayment burden through the new lender’s revised interest rates. But first, compute the financial gains from the balance transfer and future prepayments prior to making your selection.
Home Loan Tax Benefits
Under Section 24 of the Income Tax Act, you can enjoy tax rebates up to Rs. 2 lakh on the interest portion of your loan EMI. While part prepayments may diminish the rebates you might otherwise be eligible for, borrowers who foreclose or repay their house loans in full can no longer claim tax deductions.
Eligibility for Home Loan Prepayment
Anyone can make full or partial payback on their loan as long as the lender permits it. Some lenders do not allow prepayments since they may suffer losses as a consequence. Hence, check the prepayment clauses and applicable fees before finalising your lender.
Understanding Home Loan Foreclosure Norms
If borrowers have access to extra funds, they may repay the entire loan in one go before the tenor ends. This is referred to as house loan foreclosure. As mandated by the RBI, banks and lending institutions can apply prepayment charges on the outstanding loan amount only in the case of fixed-rate loans, while variable-rate loans will not attract this fee.
When Does Home Loan Foreclosure Penalty Apply?
Here are the instances in which lenders may issue prepayment charges on housing loans per RBI regulations:
- Companies or organisations availing home loans must pay prepayment fees.
- Lenders can penalise borrowers if they seek to foreclose loans at a dual rate.
- Borrowings undertaken from lending institutions for prepaying fixed-rate loans will incur prepayment charges.
When Is Home Loan Foreclosure Penalty Not Applicable?
The RBI rules state that the situations below are exempt from prepayment penalties or foreclosure fees:
- When you choose a fixed interest rate and prepay the loan using your own monetary resources.
- If you have applied for a house loan at a variable rate of interest.
- In the event that you shift to a floating interest rate following a partial prepayment.
Prepaying a housing loan can result in sizeable savings on the interest and also improve your credit score. A home loan prepayment calculator helps in estimating the savings potential through prepayment of the loan, fully or partially, when planning debt settlement. However, doing so by liquidating current investments or savings may harm your financial position. Instead, look at additional funds placed as fixed deposits for this purpose or other high-yield instruments that can serve as a contingency reserve for EMI payments and prepayments.