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Prepayment
Prepayment

Home Loan Prepayment Facility

What is Home Loan Prepayment Facility?

Home loan prepayment facility is a facility extended to home loan borrowers to repay the loan amount ahead of the original tenure. For instance, if you have taken a loan for a tenure of 240 months you can prepay the entire amount and close the loan say after 180 months. On repaying the balance principal outstanding against your loan for the remaining tenure of 60 months your liability towards your home loan repayment will stand discharged.

How is Home Loan Prepayment helpful for you?

The home loan prepayment is helpful when you receive a windfall amount and you can use the amount to pre pay the loan. The main advantage of prepayment is the saving you make on the total interest outflow. You can also prepay partially. If you make a partial prepayment, you are actually prepaying the principal amount thus reducing the balance principal outstanding. Thus, the interest rate on your home loan will now be on reduced outstanding principal lowering your interest outflow.

 

For instance, if you have a home loan with the following parameters

  • Home Loan amount of Rs 50,00,000
  • Tenure for 20 years or 240 months
  • Interest rate of 10%
  • Monthly EMI works out to Rs 48,347.58

If in the above instance you want to prepay the entire balance principal outstanding at the end of 120 months then the calculations are

  • Balance principal outstanding at the end of 120 months is Rs 36,58,518
  • Balance tenure is 120 months
  • By prepaying Rs 36,58,518 you close the loan
  • The interest you save on closing the loan by prepaying is calculated as under

Total amount to be repaid at current EMI if prepayment is not resorted to

 

Rs 48347.58x120 = 58,01,709.06

 

Out of this the principal amount is Rs 36,58,518.00

 

And the interest amount is Rs 21,43,191.60

 

Thus, if you prepay you will save the interest amount of Rs 21,43,191.60

  • If on the other hand, you want to prepay partially then on prepayment the balance principal outstanding is reduced and the interest will be charged on the new balance principal outstanding amount. In the above case, if you repay Rs 10,00,000 as prepayment then the balance principal outstanding reduces to

Rs 36,58,518.00 - 10,00,000 = 26,58,518.00

 

The home loan EMI will now be calculated on the reduced principal that would be much lower than the existing EMI for the balance tenure of 120 months

 

Thus, by making prepayment partially you would benefit by paying a lower interest reducing your EMI. If you prepay fully, then you save the interest.

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Benefits of Prepayment

The major benefit of prepayment is the reduction in the interest payable. For part prepayment, the reduction in interest due to part prepayment translates into lower EMIs.

How much loan amount can you prepay?

You can make prepayment equivalent to the balance principal outstanding to close the loan earlier than the scheduled tenure without any prepayment charges.

 

You can prepay partially subject to the following conditions

  • No limit and no prepayment charge for floating rate home loans
  • Up to 25% of principal outstanding in a year without any prepayment charges in the case of fixed interest home loans

Are there any fees or service charges incurred when you prepay home loan amount?

Yes, there are prepayment charges if the home loan is taken on fixed rate interest basis and it is 2% of the prepayment amount above 25% of principal outstanding in a year.

What are different modes to prepay loan amount?

The modes of prepaying home loan amount include

  • Auto Debit /ECS Facility:
  • PDC Facility:
  • Deduction Against Salary (DAS)

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Important Information

Recently there have been cases of fraud being committed under the name of Tata Capital or Tata Finance. Customers are requested to read the attached advisory and be aware of misleading advertisements in the newspapers. Click here to read the advisory and be aware of misleading advertisements in the newspapers.

Click here to read the advisory

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