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Tata Capital > Blog > Loan for Home > What is Home Loan Prepayment and How Does it Work?

Loan for Home

What is Home Loan Prepayment and How Does it Work?

What is Home Loan Prepayment and How Does it Work?

Owning a home is a dream for most Indians, and many of them get it through a home loan. While this financial product allows convenient access to homeownership, it also comes with a long-term commitment in terms of EMIs and interest.

Prepayment of home loan offers a smart way to significantly reduce your loan burden without waiting for the full loan term to end. In this guide, we’ll cover everything about home loan part prepayment—how it works, the home loan prepayment rules, its benefits, and the right time to make it.

What is Home Loan Prepayment?

Home loan prepayment is paying off your loan before the end of its term. This may be a full prepayment (closure of the entire outstanding balance) or a part payment, where you pay a lump sum over and above your regular EMI.

Making part payments reduces the outstanding principal on your home loan, which lowers the interest charged for the remaining term. Over time, this can lead to significant savings.

Also, read – Token money: Meaning, purpose & important things to know

How Does Home Loan Part Prepayment Work?

Let’s say you have taken a home loan of ₹50 lakh for 20 years at an interest rate of 8%. Your EMI would be approximately ₹41,822. Over the loan term, you’d end up paying ₹50 lakh in interest, equal to the principal.

Now, say you have two easy options: to make a one-time prepayment or top up the monthly EMI.

ScenarioNo Prepayment₹5L One-Time Prepayment (Year 5)₹5K EMI Top-Up (from Year 6)
Remaining Tenure20 years17.24 years17.24 years
Total Interest Payable50.37 lakh41.77 lakh43.85 lakh
Interest Saved–8.60 lakh6.52 lakh
Monthly EMI41,82237,044 (approx.)46,822

Also, read – Pledge vs hypothecation vs mortgage

Benefits of Home Loan Prepayment

Prepayment of home loan offers several benefits, including:

  • Significant reduction in interest burden
  • Shorter loan tenure or lower EMI payments
  • Prepayment of home loan gets directly applied to the principal amount
  • Useful for consolidating debt
  • Usually, floating-rate loans do not incur prepayment penalties

Key Considerations Before Prepaying

There are some prepayment factors that you should keep in mind when planning prepayment. Here is a concise list of loan prepayment considerations for a hassle-free experience.

  • Review things before prepayment. Confirm no hidden home loan prepayment charges apply to your loan.
  • Devise a loan prepayment checklist and calculate exact interest savings with online tools.
  • Opt for partial payments early to cut tenure or EMIs effectively.
  • Ensure that liquidity needs don’t drain your emergency funds when planning your home loan early repayment.
  • Follow prepay loan tips like comparing reducing vs fixed rates for the best impact.

Also, read – Can you claim home loan interest tax benefits before possession?

Part Prepayment vs. Full Prepayment

When exploring loan repayment options, it’s normal to get confused between the loan prepayment types. Here’s a quick part vs full prepayment breakdown.

  • Part prepayment cuts the principal partly. It lowers EMIs or shortens tenure. It helps you save interest without closing the loan fully.​
  • Full prepayment clears the entire outstanding amount. This helps you repay the loan early. It maximises interest savings but may add closure fees or home loan prepayment charges.​

You can choose part prepayment for flexibility and full prepayment if you have surplus funds.

Tips for Effective Prepayment Planning

With proper prepayment planning, you can save interest and cut your loan tenure. Here are key loan prepayment tips that can help facilitate an effective approach:

  • Track your loan balance regularly to time your prepayment well.
  • Set aside extra funds to avoid financial strain when you prepay loan amounts.
  • Use an online calculator like Tata Capital’s EMI calculator to check how prepayment impacts interest and tenure.
  • Prioritise making partial prepayments early for maximum savings.
  • Review your budget to ensure home loan early repayment fits your financial goals.
  • Avoid prepayment penalties by checking your lender’s terms and home loan prepayment charges when planning.
  • Combine loan payoff planning with your long-term money goals for an effective loan repayment.

A clear prepay loan strategy helps you with home loan early repayment, without any stress.

Also, read – Home Loan Insurance Benefits for New Home Buyers

When is the right time to make a home loan prepayment or part-prepayment?

The earlier, the better. During the initial years of your home loan, the majority of your EMI is used to pay interest, and only a small portion goes toward repaying the principal. So, if you make the fixed home loan part prepayment in the initial half of the term of the loan, the reduction in interest saving is far higher.

Example:

₹3 lakh paid in year 3 can save much more interest than ₹3 lakh paid in year 12.

So if you get a salary hike, bonus, or windfall gains from investments, you may consider using a part of it for prepayment of home loan.

Also, read – How a Bounced Cheque Will Reduce Your CIBIL Score?

Home Loan Prepayment Charges

If you have a floating-rate home loan, the RBI mandates that there should be no prepayment charges. This means that according to home loan prepayment rules, you can make part-payments whenever you like, without paying any penalty.

However, for fixed-rate home loans, lenders may charge a small fee (usually 2%–4% of the prepayment amount). Always check your home loan prepayment charges and agreement or consult your lender before making any prepayment.

EMI vs. Part-Prepayment: Which is Better?

If you want to pay your loan sooner and reduce your interest outgo, increasing EMI or making regular prepayment of home loan, both work well.

Here’s the distinction between the two:

AspectIncreasing EMIPart-Prepayment
Suitable ForSalaried individuals with steady incomeBusiness owners/freelancers with irregular income or windfall gains
FrequencyMonthlyOccasional (whenever surplus funds are available)
How it worksYou increase your EMI, lowering interest & tenureYou pay a lump sum towards the principal, hence decreasing the tenure or EMI
Budget ImpactMonthly cash flows reduceOne-time use of savings
Tenure ReductionYesYes
Interest SavingsModerate to HighHigh
FlexibilityLess flexibleHighly flexible

If your income is consistent and growing, you may consider increasing your EMI.

If your income is irregular or you receive occasional windfalls, you can opt for home loan part prepayment.

Both approaches help you pay less in interest and clear your loan faster.

Conclusion

Prepayment of home loan is one of the smart financial moves. It pays down your debt, saves on interest outgo and provides peace of mind. Even if you cannot afford to make a prepayment at one go (in the form of full prepayment), making home loan part prepayment regularly (particularly in the initial years) can have a significant impact. Avoid using your entire emergency fund for prepayment, and check with your lender about any home loan prepayment charges or home loan prepayment rules if you have a fixed-rate loan. Use digital tools, stay financially disciplined, and watch your loan get lighter every year.

Looking to manage your home loan better or make a part-prepayment? With Tata Capital, you get flexible repayment options, competitive interest rates, and tools like EMI calculators to help you plan every rupee wisely.

Download the Tata Capital App or visit the website now for on-the-go loan management.

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FAQs

How does partial prepayment work in a home loan?

Partial prepayment reduces your outstanding loan principal, which lowers your interest burden and shortens your loan tenure or EMI, depending on your preference.

Is it good to make a prepayment on a home loan?

Yes, if done early and strategically, it can save you on interest and help you close the loan years ahead of schedule.

What happens if I pay 2 EMIs extra every year?

Paying 2 extra EMIs annually can reduce your loan term by several years and save a lot in interest without much financial strain.

Is there any lock-in period for prepayment?

Floating-rate loans usually have no lock-in. Fixed-rate loans may have a 6–12 month lock-in, so check your agreement or ask your lender.

Is it better to increase EMI or prepayment?

Both help reduce your loan burden. Increasing your EMI speeds up repayment regularly, while prepayment gives flexibility with larger lump sums when you can afford it.

How does prepayment impact my EMI?

Prepayment of home loan directly reduces your outstanding principal on the loan. After prepayment, you can either keep the EMI similar and shorten tenure, or reduce EMI for the same tenure.

Are there any penalties for prepayment?

Yes, penalties for prepayment of home loan can exist, especially for fixed-rate loans. These are generally waived off for floating-rate loans.

How do I calculate interest savings from prepayment?

You can use Tata Capital’s online EMI calculator to calculate your interest savings before and after prepayment of home loan and compare them.

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