Home loan: This strategy will save Rs 16 lakh on Rs 40-lakh loan, finish it 6 years early
How partial prepayments help
An EMI factors in both interest and principal payments. Higher the outstanding principal, higher the interest part in an EMI. If you can bring down outstanding principal, the interest part will come down and the principal repayment will be higher.
This is what a partial repayment does. “A prepayment is counted only against the principal. You can devise a prepayment plan to pay off your loan quicker,” says Adhil Shetty, CEO, Bankbazaar.com.
You need not necessarily make a big partial prepayment as even small ones can make a significant difference.
“If you borrowed Rs 50 lakh at 7% for 20 years, your interest is going to be 43.03 lakh and your EMI, Rs 38,765. If you pre-pay a single EMI right at the start of the loan, your loan tenure reduces by three months and your interest by Rs 1.15 lakh,” says Shetty.
Imagine the impact if you make many such partial prepayments.
Things to keep in mind when planning a partial prepayment strategy
While there is no prepayment penalty on partial prepayment of a floating rate home loan, the rules regarding minimum prepayment amount will vary depending on the lender. “You can pre-pay as much as you want, subject to the lender's conditions on the minimum prepayment amount,” says Shetty.
If borrowers get very ambitious with the partial prepayment, it can put their finances under stress in case of an eventuality.
It may even make it difficult for them to even continue paying the regular EMI. On the other hand, a very small prepayment will not do any meaningful contribution towards bringing down the interest outflow. “The key is to find a balance between getting out of the debt and balancing your savings and investment needs,” says Shetty.
There are various ways in
