Is Home Loan Prepayment a Good Option?

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Prepayment a Good Option


Home loan prepayment is beneficial for all property owners who are looking to ease off their financial stress or burden. It assists in saving the interest constituent and permits you to accumulate more wealth for future investments. A loan of any kind, may it be an SBI Plot Loan, HDFC Plot Loan, or a loan against property, is nothing but a liability that an individual wants to offload as fast as possible. Here’s a guide to the home loan prepayment procedure to assist you in making an informed decision.

What is meant by loan prepayment?

Prepayment is early loan repayment. Generally, individuals with surplus money can opt for the home loan prepayment option. They usually opt for the prepayment option because doing so leads to a reduction in the overall interest constituent accumulated at the starting stages of a home loan. Loan prepayment can be done in the listed 2 ways –

Part prepayment

Part prepayment of the home loan permits you to prepay the loan intermittently when you get a windfall gain. For example, if you currently receive a bonus, then you may think of undergoing a prepayment of Rs 2 lakh against the loan proceeds equalingRs 20 lakh. It means you have not thoroughly closed the home loan but have moderately released the loan burden that may impact the principal proceeds. However, few banks allow the loan prepayment of nearly 3 times your prevailing EMI.


Foreclosing a home loan is thoroughly closing the home loan account with the lender or bank. For instance, you have a home loan, and the amount remaining with the interest constituent is Rs 10 lakh. Suppose you have all the finances ready and looking to undergo full payment to close the loan account, then this would mean loan foreclosure. You can also foreclose the loan when another lender is providing a lower rate of interest and want to shift the loan to that bank. However, few banks may levy an additional per cent on the foreclosure in the case you are serving a fixed interest rate home loan.

Also Check: HDFC Plot Loan

What are the benefits of home loan prepayment?

Reduction in loan repayment tenure

When you partly make loan prepayment, it results in loan tenure reduction. For example, if you have availed of a loan equalingRs 20 lakh for 15 years and you make the prepayment of about Rs 4 lakh, then the bank authorities may provide you with 2 choices – a reduction in loan repayment tenure or on monthly EMI. So, you will require choosing the feasible one amongst both the choices. This will considerably impact your principal constituent and lower the interest on the whole sum.

Financial freedom

Making loan prepayment endows you with peace and assists you in wearing off the financial stress of liability. You can save a massive amount of money when you make loan prepayment, which massively consists of an interest in formative years.

What are the tips you may follow to prepay a home loan?

Examine your EMIs annually

Paying a higher loan EMI or opting for balloon repayment is looked upon as one of the prudent ways of ensuring that you will effectively repay your loan before the repayment tenure ends. When you make payments of higher EMIs, you can lower a few months or even years from your home loan repayment tenure. You can enhance your loan EMI by Rs 3,000 or Rs 5,000 according to the amount and loan tenure. To compute your loan EMIs and repayment tenure period, use an online home loan calculator.

Begin investing wisely

Being a buyer of a home loan, you must ensure to invest your money in a prudent manner to generate substantial funds to prepay your loan. Try and invest in options delivering returns of as high as 13 to 15 per cent, like the SIP or Systematic Investment Plan. This will provide you with more income than the interest rate of 10.5 – 11.5 % that you may be repaid on your home loan. You can use this variant amount to make a home loan prepayment.

Channelize your existing savings or investments to repay the loan

Use variable or bonus pay, fixed deposit or other saving instruments to make home loan prepayment as the long-term investment may yield substantial returns for you, while a long-term debt may burden you owing to its higher interest constituent.

Transfer to the bank that levies a lower rate of interest 

Transferring your home loan to another lender that offers a lower rate of interest on a home loan is a good choice. This can be attained by opting for balance transfer schemes. As per this scheme, the principal or the major amount of the loan is transferred to another lender for a lower rate of interest. However, ensure you do not opt for it frequently or to witness minor changes. It is so as each time you switch to a distinct bank, and you will have to undergo the thorough documentation and home loan evaluation process as in the case of availing a new home loan. For this option, lenders even charge a processing fee on the outstanding loan for processing the facility. It is highly recommended to keep a close watch on the market as banks or NBFCs tend to announce lower rates and attractive offers during festivals.

What are the drawbacks of making home loan prepayment?

Penalty incurred by the existing lender.

Lenders lose out on potential interest components when you prepay your loan. Thus, they may charge nearly 2 to 4 % penalty on the outstanding loan proceeds to make up for the loss in interest. It is majorly implemented if you were serving home loans on fixed rates.

Loss of tax benefits

Making home loan prepayment may make you ineligible for different tax exemptions available to you as a borrower. In the scenario of a self-occupied home, you may claim deductions on interest payments of as high as Rs 2 lakh. Moreover, you can claim a tax deduction of as high as Rs 1.50 lakh on principal repayment.