Is prepaying your home loan the best choice? Here's how to decide

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Also Read: Top 5 banks offering low interest rates on home loans; check full listMaking prepayments at different times has a different impact on your home loan journey. And the best way to understand how, is to illustrate with an example.Suppose you take a ₹50 lakh home loan for 25 years at an 8.5% rate of interest.

Your monthly EMIs will be ₹40,261 and during the course of 25 years (assuming regular EMIs but no prepayments), you will not only repay the original ₹50 lakh principal, but also an interest of ₹70-71 lakh.Monthly EMIs are structured in a manner that it has two parts – principal and interest. And the ratio of the two changes throughout the loan tenure.

And home loans are front-loaded when it comes to interest servicing.

Also Read: Want to take a home loan overdraft facility? Here are its pros and consWhat this means is that during the initial years, a major part of the monthly EMI goes towards interest servicing and a very small part goes towards principal repayment. But with each passing year (or even month), the share of principal in the EMI keeps ticking up and that of the interest component keeps ticking down.

And it is this front-loaded structure of interest that the earlier you make a prepayment in the tenure, the better it is.So, say on a ₹50 lakh home loan, if you decide to make a single, one-time prepayment of ₹5 lakh, then how it impacts the total interest burden and the loan tenure varies with the time of prepayment.Let me show this by extending our example:No Prepayment: If you don’t make any prepayment, then the total interest paid will be ₹70-71 lakh. Loan Tenure will remain the same as the original 25 years.Prepayment of ₹5 lakh at the start of 2nd year: If you make a one-time ₹5 lakh prepayment