Buying a home is a dream for many, but the long tenure and high interest payments on home loans can feel overwhelming. The good news? By making smart prepayments, you can save lakhs of rupees on interest and become debt-free much earlier than planned.
Let’s explore how you can make your home loan work in your favor with strategic prepayments.
What is Home Loan Prepayment?
Home loan prepayment means repaying a part of your outstanding loan amount before the due schedule. It can be:
Partial Prepayment: Paying extra (apart from EMIs) to reduce the principal.
Full Prepayment (Foreclosure): Repaying the entire loan before the tenure ends.
Why Prepay Your Home Loan?
Save on Interest: Prepayments reduce the principal balance, lowering interest outgo.
Shorter Tenure: Even small prepayments can cut years off your loan.
Financial Freedom: You get peace of mind by closing your loan earlier.
Improved Credit Score: Clearing debt sooner strengthens your financial profile.
Smart Prepayment Strategies
1. Start Early
Prepaying in the initial years has the maximum impact since EMIs are interest-heavy in the beginning.
2. Use Annual Bonuses or Windfalls
Direct any salary bonuses, incentives, or investment gains toward prepayments instead of lifestyle expenses.
3. Increase EMI Amount Gradually
Even a 10–15% increase in EMI can help close your loan much faster without burdening you.
4. Opt for Partial Prepayments
Instead of waiting for a lump sum, make small but regular prepayments every year.
5. Avoid Extending Tenure
If you refinance or restructure, ensure tenure doesn’t increase—it cancels out your prepayment benefits.
Example: How Much Can You Save?
Loan Amount: ₹50 lakh
Tenure: 20 years
Interest Rate: 8%
EMI: ~₹41,822
If you prepay just ₹2 lakh every year for 5 years, you could:
Save ₹14–18 lakh in interest
Close the loan 5–7 years earlier
FAQs:
Q1. Can I prepay my home loan anytime?
Yes, most banks allow partial or full prepayment. For floating-rate home loans, no prepayment penalty applies.
Q2. Is it better to increase EMI or make lump-sum prepayments?
Both help, but lump-sum prepayments reduce principal faster, while higher EMIs ensure regular repayment discipline.
Q3. Should I use savings or investments for prepayment?
Only use surplus funds after maintaining an emergency corpus. Don’t liquidate high-return investments for prepayments.
Q4. Does prepayment affect tax benefits?
Yes, reducing interest means lower tax deductions under Section 24(b). However, long-term savings outweigh the tax loss.
Q5. How do I track my prepayment impact?
Ask your lender for an updated amortization schedule to see how prepayments reduce tenure and interest.
Published on : 30th September
Published by : SMITA
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