Since a home loan can stretch for 20 years, borrowers must prepay it whenever possible to save on interest and reduce the tenor or EMIs.
Customers look for ways to reduce financial liabilities during the repayment tenor. As home loans require long-term financial commitments from home-owners, they can opt for a few techniques to save money.
Financial institutions offer home loan repayment options to their customers to facilitate growth in an individual’s savings fund. Individuals can thus avail of this option to avoid paying high-interest charges throughout a home loan.
Home Loan Prepayment to Save Money
Home loan prepayment is a widely popular repayment strategy that enables customers to cope with home loans with high-interest rates. Usually, lenders charging high rates of interest over long tenors often cause individuals to set aside more funds for repayment. In turn, it affects the savings and debt-to-income ratio of customers.
How Does Home Loan Prepayment Work?
Individuals who are servicing their home loans can choose to prepay a portion of the whole of the principal home loan amount. Full prepayment or part prepayment of housing loan facilities are only feasible when customers have enough personal funds to dispose of a home loan earlier than the stipulated tenor.
Customers can leverage their salary bonuses, maturity amount of an investment, or other sources to fund the entire prepayment process. A large amount of money used to pay off either a portion or whole of the outstanding balance in the home loan account.
As the home loan principal amount decreases, interest to be paid on the remaining sum also increases. An individual can thus manage the burden of home loan repayments.
Customers can also alter their home loan repayment schedule depending upon the sum invested in the prepayment process.
The repayment amount, schedule, interest rates, and EMIs, customers can avail of the benefits of an online home loan repayment calculator.
Outcomes of Home Loan Prepayment
Individuals have several home loan repayment options to choose from to save a significant amount through prepayment. Customers can come across any of the following outcomes while choosing the prepayment process as a money-saving option –
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Decreased EMI payment
Prepayment substantially decreases the outstanding principal of the home loan. Thus, repaying the remaining loan becomes comparatively easy.
Despite this advantage, individuals should maintain their existing EMI amount for home loan repayment. In case EMI decreases, customers have to keep paying the amount for a longer tenor. However, paying an EMI for a longer tenor also eventually increases the interest payment, affecting the individual’s savings corpus.
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Lower tenor
Choosing the same EMI amount helps the individual service the loan quickly and efficiently, thereby reducing the interest component and tenor of the home loan. Maintaining the EMI amount, thus saves the customer’s money.
With shorter tenors, customers can amortize their loans in a short duration. It helps them save a considerable amount on interest payments.
Things to consider before availing prepayment facilities
As prepayment involves the investment of a considerable sum in the repayment process, individuals have to consider whether investing the fund in other high-return investment schemes brings higher returns.
A proper calculation of the savings on interest payment over a tenor and the returns from an investment scheme will help an individual make an informed decision.
Additionally, several financial institutions also charge prepayment fees to borrowers choosing to reduce their outstanding balance on home loans.
Customers can save money by using prepayment as a home loan repayment strategy. Individuals benefit from decreased EMIs or lower tenors, which ultimately reduces the burden of hefty interest payment on them.
Takeover:
Other prominent home loan repayment techniques include balance transfer facilities, whereby an individual can shift the outstanding balance of a loan from one lender to another, providing more affordable interest rates on existing loans.
