When a Home Loan borrower repays the loan partially or fully before the decided loan tenure, it is called Home Loan prepayment. It is an excellent way to reduce the loan burden by reducing the EMI or the loan term. Either way, the borrower saves substantially on the interest when they prepay the loan.
The Home Loan prepayment calculator is a valuable tool for those looking to make prepayments against their Home Loan. The online tool helps calculate how much a borrower will save on the interest cost and how it will affect the loan EMIs. A Home Loan calculator with prepayment displays the results within seconds based on the loan amount, interest rate, tenure, prepayment amount, and EMIs paid.
How Does a Home Loan Prepayment Calculator Work?
A Home Loan prepayment calculator is readily available online, It is speedy and user-friendly. The user must enter the requisite loan-related details, including the loan amount, tenure, interest rate, instalments paid, and prepayment amount. After entering these variables, click ‘Calculate’ to estimate the interest savings after loan prepayment.
Eligibility for Loan Prepayment
Any borrower who gets a home loan approved qualifies for loan prepayment. A Home Loan borrower can prepay the outstanding loan amount partially or entirely as per their requirement. It is important to enquire about the prepayment clause before signing the loan agreement.
Housing Loan Prepayment Charges
Lending institutions must follow the RBI-generated guidelines for Home Loan prepayments. These include:
- When loan providers can charge prepayment charges
- if the applicant is a non-individual borrower
- if it is a fixed interest rate loan
- if the borrower is refinancing the loan from another lender
- if it is a dual-rate loan and the borrower decides to prepay it during the fixed rate period
- When loan providers cannot charge prepayment charges
- if the loan has a floating interest rate
- if the applicant is an individual borrower
- if the borrower is prepaying the loan with their funds
- if it is a dual-rate loan and the borrower decides to prepay it during the floating rate period
Dual-rate Home Loan is an arrangement where the interest rate remains fixed for the first few years of the loan term and converts into floating afterward. Use a Home Loan calculator with a prepayment option and calculate the benefits of prepaying vs continuing with the loan.
Things to Consider Before Prepaying a Home Loan
Age:
If the borrower is approaching retirement, prepaying the loan before retiring is advisable. It reduces the probability of defaulting as the borrower will not have any income after retiring.
Future Cash Needs:
Calculating the future cash needs is essential before making the prepayment. Once the borrower prepays the Home Loan, which often involves a substantial amount, it is likely to exhaust all savings, causing a cash crunch for future financial requirements. Therefore, ensure making a robust financial plan before making a prepayment decision.
Tax Savings:
A Home Loan brings several income tax benefits with it. Currently, the borrower can claim a tax deduction of up to ₹ 1.5 Lakh per annum on the principal amount under section 80C. Borrowers can also claim a tax exemption of up to ₹ 2 Lakh on the interest under Section 24(b). Moreover, the Union Budget 2021-22 also extends Section 80EEA, allowing an additional deduction of ₹1.5 Lakh on the interest cost. If the borrower prepays the loan, they stand to lose out on these tax savings.
Cost Saving:
A borrower must consider prepaying a Home Loan only if they are sure to save enough with the decision. If the saving is not substantial, it’s better to avoid the prepayment. For instance, if an individual has already reached the last stages of a Home Loan, the outstanding interest component will be negligible compared to the loan’s initial years. Therefore, prepaying the loan during this time will not be beneficial in certain cases.
If the borrower has sufficient funds for loan prepayment and they don’t have any other financial plans, repaying the loan earlier is the best option. It is an excellent way to save money and make the borrower debt-free sooner.