A home loan is a significant and long-term financial commitment for the majority of borrowers. Most aspiring homebuyers stretch their means to get the highest loan possible. Hence, it involves a substantial amount that one must repay over 20-25 years. However, with time, most borrowers see the loan as a burden and wish to become debt-free as soon as possible. Part prepayment is an excellent method of bringing down the outstanding loan. However, identifying the right time to pay the home loan in parts depends on making several calculations beforehand. It must help achieve the financial goals and pay off the loan without adding to the financial burden.
Here are situations when home loan part prepayment will be of great use. Take a look:
1. When a significant portion of the home loan is left for payment
A part payment pays off when the home loan has around 12-15 years left in its tenure. As a home loan tenure is 20-25 years, ensuring part payment reasonably before the term-end yields maximum savings for the borrower. Many lending institutions charge some percentage of the outstanding loan balance for part payment, plus taxes. So, if the loan has reached its term end, the borrower has already paid a lot, and the prepayment charges may drastically reduce the savings. Ideally, part payment after 3-4 years of the loan term will bring massive savings compared to the part payment at the time when only five years of tenure are left.
2. When the outstanding balance is high
When the outstanding loan balance is high, the borrowers might not have enough savings to pay it off before the loan tenure. However, they may pay a considerable chunk of the loan balance and reduce the interest payments. Most lenders allow part payments on home loans and have a home loan calculator with prepayment to estimate the savings and charges. It helps check the mathematics and plan the part payment accordingly.
Ideally, a borrower may go for one of the two prepayment options: reduce the EMIs or shorten the loan tenure. Those who can afford a bigger EMI may shorten the loan tenure to pay the loan faster, while others may reduce the EMI amount while keeping the term the same. The final choice depends on the borrower’s monthly budget and repayment capacity.
3. When there are multiple outstanding loans
Facing several debt obligations keeps an individual heavily burdened financially, and prepayments help reduce this burden significantly. While managing multiple loans simultaneously, a borrower may use the option of home loan part prepayment to lessen the financial burden whenever possible. Going for the same EMI amount after the part payment ensures faster loan repayment. Once that happens, the borrower feels relieved with one less debt to pay.
4. When retirement is approaching
Ideally, an individual should start saving for retirement from an early age. However, not everyone plans for the future at the beginning while they are busy enjoying the present. Paying off a loan with considerable time left for retirement helps an individual make substantial savings. That is where a part payment makes sense. If a full prepayment is not possible, a part prepayment can save a substantial amount for retirement.
When to Avoid Part Prepayment
While cost-saving is the primary reason borrowers opt for a part prepayment, they must do some cost-benefit analysis before finalizing their decision. Here are a few instances when prepayment is not advisable.
When the savings are insignificant: Avoid prepayment if there are no or low savings. Keep the limited amount aside for other financial obligations and emergencies, and prepay only when you have extra funds.
When the tax benefits are compromised: Individuals prepaying a loan often lose some or all the tax benefits. Loan prepayment helps pay off the loan faster, but it may result in a considerable loss of tax benefits.
When there are higher-interest debts to repay: It is unwise to pay off a low-interest loan when there are higher-interest loans to repay. Consider prepaying them first to save more money.
Home loan part prepayment is an attractive proposition, as it allows borrowers to reduce the repayment burden and minimize the interest costs. However, do some calculations and find the right time to prepay the loan and maximize the savings.
