home loan prepayment

Understanding the Benefits of Early Home Loan Repayment

3 minutes, 58 seconds Read

In the current scenario, the process of availing a home loan to buy a house is quite popular. It enables individuals to own their dream house, regardless of their financial background. However, with a large number of people taking loans, there is a widespread need to understand the benefits of early home loan repayment. In this article, we will decode how early home loan repayment can help and showcase our calculations that will provide an insight into the same.

To start with, it is imperative to understand the concept of home loan prepayment. It means paying off the loan amount before the scheduled term ends. Early home loan repayment helps in saving money, reducing the loan tenure, and relieving the burden of EMIs. While housing loan interest rates can vary, an early repayment plan calls for a reduction in the principal amount, which can lead to significant savings.

Benefits of Early Home Loan Repayment

One of the most significant benefits of early home loan repayment is a reduction in interest payable. The EMIs paid every month carry interest, a portion of which goes towards the principal amount while the rest goes towards the interest amount. Hence, a significant part of the EMI goes into the overall interest amount, making the total amount paid towards the loan higher. Early home loan repayment helps in reducing the principal amount, thereby reducing the total interest payable. The reduction in the principal amount leads to a reduction in interest charged on the loan, which consequently reduces the loan burden.

Let us now look at how early home loan repayment works through a simple calculation. Let us assume that the loan amount is INR. 50 lakhs, the loan term is 20 years, and the interest rate is 7%. The monthly EMI will be INR 39,145.

If the borrower decides to repay the loan amount ahead of schedule and pays INR 1 lakh every year, the borrower can save a significant amount of interest. Considering that the borrower pays INR 1 lakh every year, the principal amount reduces, reducing the interest charged and reducing the loan tenure. The borrower will be able to save INR 8 lakhs by prepaying the loan amount over ten years and will be able to repay the loan in 15 years instead of 20 years.

Hence, early home loan repayment can help borrowers save money by paying lesser interest and reduce the loan burden to make their life easier. Another crucial aspect of early home loan repayment is that it can help individuals become debt-free quicker, giving them more peace of mind.

Understanding How to Repay Early Home Loan

Now that we understand the benefits of early home loan repayment, the next step is to calculate how much amount needs to be paid to repay the loan earlier. The use of a home loan prepayment calculator can assist with this calculation. A home loan prepayment calculator takes into consideration the loan amount, interest rate, loan tenure, and the amount that the borrower wishes to prepay, to calculate how much amount needs to be paid to repay the loan earlier.

To further explain, suppose that the borrower decides to prepay an additional amount of INR 3 lakhs every year, which helps reduce the loan tenure and save on interest. By using a home loan prepayment calculator, we can see that the borrower will be able to save INR 12 lakhs on interest and the loan tenure will get reduced by close to nine years.

Additionally, the borrower will be able to completely repay the loan amount in just 11 years instead of the scheduled 20 years. This calculation emphasizes the importance of early home loan repayment by showcasing how much time and money the borrower can save by prepaying the loan amount.

One crucial point worth noting is that in India, borrowers usually go for a floating rate of interest rather than a fixed interest rate on their housing loan. A floating rate refers to a loan in which the interest rate fluctuates with the market conditions. If an individual decides to prepay their loan, the interest rate change can make a considerable difference.

One must be vigilant and calculate the new EMI and total savings as per the latest interest rate. The home loan prepayment calculator is an excellent tool to use to calculate the interest rate and see how it impacts the savings after early home loan repayment.

Conclusion

In conclusion, early home loan repayment is an excellent way to relieve oneself of the burden of EMIs and become debt-free faster. Prepayment of home loans helps reduce the interest amount, save on money, reduce the loan tenure, and overall, lead to a better financial life. Using a home loan prepayment calculator can assist one in calculating the amount to be pre-paid and determine their path to financial success.

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