Part payment of Home Loan

Benefits of part payment of home loan

Paying extra amounts on your home loan brings great financial benefits. You can manage your home loan better when you know these advantages.

Reduced Interest Burden

Your extra payments directly lower the principal amount and this cuts down the interest on what remains. You can save a lot on interest costs when you make regular extra payments, especially in your loan’s early years. Your annual bonus can become an extra payment that saves interest and helps you pay off the loan faster.

Shortened Loan Tenure

Your loan tenure drops when you keep paying the same EMI after making extra payments. This helps you become debt-free faster and saves money on interest. A shorter tenure means you pay interest for fewer years, which leads to big savings over time.

Flexibility in Loan Management

Extra payments give you great control over your home loan. You can pick between:

This flexibility lets you use any extra income to reduce your debt. You can use the money you save for other goals like retirement planning or your children’s education. Extra payments also boost your credit score, which helps you get better loans in the future.

Things to Consider Before Making Part Prepayment

Smart financial planning requires you to think over several factors before making a part payment of home loan. A good understanding of everything in this process will help you get the most benefits and avoid potential risks.

Prepayment Penalties and Charges

RBI guidelines state that lenders cannot charge prepayment penalties on floating rate home loans. Fixed-rate loans usually come with a penalty between 1% to 3% of the prepaid amount. You should calculate whether interest savings outweigh prepayment charges if you have a fixed-rate loan. Housing Finance Companies (HFCs) can levy penalties only when you repay through another bank or financial institution.

Timing of Prepayment

Your EMI’s interest component peaks during the first few years of your loan tenure. The maximum interest savings come from prepayments made early in your loan cycle. Prepaying during later stages might not benefit you much since you would have already paid most of the interest.

Effect on Credit Score

Regular part prepayments show financial responsibility and boost your credit profile. Your credit report updates within 45-60 days after the payment date. We noticed that lower loan obligations create a good impression on your creditworthiness. This can improve your chances of future loan approvals.

Note that you should keep enough emergency funds instead of using all savings for prepayment. This balanced strategy will give a solid foundation while you manage your home loan effectively without compromising other vital financial goals.

Part Prepayment vs. Full Prepayment: What’s the Difference?

The difference between part prepayment and full prepayment will help you make better decisions about managing your home loan. Both options reduce your loan burden but serve different financial goals.

Here’s a detailed comparison between both prepayment types:

Part prepayment gives you more flexibility because you can make multiple payments whenever you have funds available. You can keep your emergency fund intact while reducing your loan burden. Full prepayment needs a larger upfront amount but eliminates your entire debt right away.

Your financial goals and available funds will determine which option works best for you. Part payment of home loan makes sense if you want to reduce debt gradually and keep your savings. Full prepayment works better when you have enough money and want to clear your debt immediately.

How to make part payment of home loan?

Want to make a part payment of home loan? A systematic approach will give you smooth processing of your request. Here’s a simple guide to help you complete your part prepayment successfully.

1. Assess Your Financial Position
   • Keep 3-6 months of living expenses as emergency fund
   • Check available funds without straining finances
   • Look at other financial commitments
2. Review Loan Terms
   • Read loan agreement’s prepayment clauses
   • Check prepayment limits and penalties
   • Know how it affects EMI or tenure options
3. Document Preparation
   • Get loan account details ready
   • Keep identity proof ready
   • Fill out prepayment request form
   • Get payment instrument (cheque/demand draft)
4. Contact Your Lender Your bank branch or online banking platform helps you:
   • Submit written application
   • Share prepayment amount details
   • Choose between EMI or tenure reduction
5. Get Confirmation The process gives you:
   • Written acknowledgment
   • Updated loan balance statement
   • Revised amortization schedule showing:
     • New loan balance
     • Modified EMI or tenure
     • Lower interest payable

The best time to make prepayments is early in the loan tenure because interest costs are higher during the first few years. You can also use bonuses, tax refunds, or unexpected income to make periodic prepayments and save more money.