Should you prepay home loan?:Looking to save on interest? Find out what experts say

Every person dreams of having their own house. To fulfill this dream, most people take a ‘home loan’ and keep paying EMIs for years. In this way, over a long period, you end up paying approximately four times the borrowed amount to the bank. But suppose you receive extra money, should you pay off the loan before time, which is called ‘loan prepayment’. So the question is whether it’s right to keep paying EMIs for the entire loan period or is it better to prepay the loan. What is ‘home loan prepayment’. Lets also ponder upon following points:
Question- What is home loan prepayment? Answer- Home loan prepayment means ‘paying off part or all of the loan before the fixed term.’ This reduces the principal amount and decreases the interest in upcoming EMIs. In some cases, banks charge prepayment fees. Therefore, it’s important to properly assess the interest savings and potential charges before prepayment. Generally, loan prepayment charges are much lower compared to interest. Question- What are the rules for home loan prepayment? Answer- According to Reserve Bank of India rules, if you have taken a loan for your residential house and it is on floating rate (interest fluctuates), no prepayment charge can be levied. However, banks can charge fees on fixed rate loans. See the graphic for complete information-
Understand in detail when banks or HFCs (Housing Finance Companies) can charge prepayment fees on home loans- Home loan is in company or firm’s name
If a company or firm has taken a home loan to purchase a house or building. If the company wants to prepay this home loan, they will have to pay a prepayment fee. Home loan is on fixed rate
If your home loan interest rate is fixed and you want to prepay, according to RBI rules, you will have to pay a prepayment fee. In such cases, both banks and HFCs can charge prepayment fees. In fixed interest rate loans, the interest rate remains the same throughout the term. However, HFCs can only charge prepayment fees when you are repaying the home loan by taking a loan from another bank or HFC. When home loan has dual rate?
In dual rate home loans, the interest rate remains fixed for a few years. After that it converts to floating rate. If you have taken such a loan, banks can charge fees for early closure. Banks cannot charge prepayment fees under these conditions: Rules for Floating Rate Home Loan
If a person has taken a floating rate (with interest rate fluctuations) home loan, no charges are levied on early payment (prepayment). Whether you make partial payment of the loan or fully repay it, no additional fees need to be paid. Fixed Rate Home Loan Payment from Own Funds
If a person has taken a loan from a Housing Finance Company (HFC) at a fixed rate and is repaying it from their own funds, the HFC cannot impose a prepayment penalty. Dual Rate Home Loan
When the loan interest rate changes from fixed to floating rate, both banks and HFCs cannot impose any kind of penalty on the prepayment of that loan. Question- What are the advantages and disadvantages of prepayment?
Answer- The biggest advantage of prepayment is that it saves money that would go towards interest. This helps finish the loan earlier and provides mental relief. It also improves credit score. However, there are some disadvantages too. If the prepayment charges are high or you don’t have an emergency fund, it’s better to delay prepayment. See all the advantages and disadvantages in the graphic- Question- What is the right time for home loan prepayment?
Answer- The first 5-7 years are considered best for prepayment, because during this period a large portion of EMI goes towards interest. Additionally, it’s wise to make prepayments when you receive bonus, investment maturity or additional income. If interest rates are rising and your loan is on floating rate, then also prepayment can be beneficial. However, it’s important to first take care of your emergency fund and other necessities. Question- Does prepayment affect credit score? Answer- Yes, prepayment can improve your credit score. Paying off the loan early strengthens your credit history and shows that you are a responsible borrower. This can help you get loans more easily in the future. Question- Does home loan prepayment reduce EMI or loan time period? Answer- Banks provide two options at the time of prepayment- Generally, reducing the loan tenure is more beneficial, as it results in significant savings in total interest. Reducing EMI decreases the monthly burden, but interest savings are not as much. Therefore, if your income is stable, reducing the tenure is considered a better option. Question- How much prepayment is right? Answer- You should only make prepayments that don’t affect your financial condition. Generally, people make additional payments of 10-30%. This provides good interest savings while maintaining liquidity. Always keep sufficient money aside for emergency funds, insurance and essential expenses. Don’t spend all your savings on loan repayment. Question- Which is better between investment and prepayment? Answer- This completely depends on your financial condition and the market. If the returns from your investments are higher than the home loan interest rate, then investment could be a better option. If you want to avoid risk and the interest rate is high, then prepayment is a good option. Taking a balanced approach is better. Question- Is it necessary to make prepayment every time? Answer- No, prepayment is not necessary every time. If you have extra money, first look at what your other financial priorities are – like emergency fund, insurance, children’s fees, etc. Only make prepayments after fulfilling these needs. It would not be a wise decision to disturb financial balance just in a hurry to end the loan.