Prepaying a home loan cuts the interest you pay, and on most floating-rate loans it costs nothing. Before you do it, learn the rules, the paperwork and the effect on your EMI and tenure.
What counts as prepayment?
Prepayment means paying the bank more than your scheduled EMI. There are two kinds.
- Part-payment: you pay a lump sum, for example 5 lakh from a bonus, and the loan continues.
- Foreclosure: you pay the entire outstanding amount and close the loan.
You can also pay a little extra every month, which works like many small part-payments.
Is there a penalty?
For a floating-rate home loan taken by an individual, RBI rules say banks and housing finance companies cannot charge a prepayment penalty. This holds whether you use your own savings or money from another lender, and for both part-payment and foreclosure. The rule is mainly for loans taken for non-business purposes.
A fixed-rate loan is different. A lender may charge a fee, commonly a percentage of the amount prepaid, so read your agreement first. If your loan is a fixed rate that turns floating after a few years, the penalty-free rule applies once it is floating.
Some banks set a minimum part-payment amount, often one EMI, or limit how often you can do it. Ask for these terms. They are allowed, but a ban on prepayment is not.
How part-payment works
- Ask your bank how to make a part-payment. Many have an online option, others need a request form.
- Pay the amount by transfer or cheque. Make sure it is marked as a principal part-payment, not as an advance EMI.
- Choose the effect. You usually get two options: keep the EMI and finish sooner, or keep the tenure and lower the EMI.
- Check the next statement. Confirm the outstanding principal fell by the full amount.
A worked example
You have a 50 lakh loan at 8.5% for 20 years, with an EMI of about 43,391. After three years you receive a 5 lakh bonus and prepay it, keeping the EMI the same.
- Without the prepayment, you pay about 54.14 lakh in interest over 240 months.
- With the prepayment in month 36, the loan ends after about 199 months, which is 41 months earlier.
- Total interest falls to about 40.94 lakh, so you save about 13.2 lakh in interest.
The same 5 lakh paid in year 15 would save far less, because by then most of each EMI is already principal.
Which effect should you choose?
- Reduce tenure gives the biggest interest saving. It is the right choice if your EMI is comfortable today.
- Reduce EMI gives breathing room each month. Choose it if your budget is tight or your income may fall.
Whichever you choose, you can keep paying your old EMI after an EMI cut. That gives you most of the tenure benefit anyway.
Things to keep in mind
- Keep an emergency fund before you prepay. Money paid into a home loan cannot be taken back easily.
- If you claim tax benefits under Section 80C, prepaying principal still counts as principal paid in that year.
- A loan with a lower rate than your expected investment returns may not need aggressive prepayment. A high-rate loan usually does.
Closing the loan fully
If you want to foreclose, ask the bank for a foreclosure statement that shows the exact amount due on a given date, including interest up to that day. Pay it, then collect a no-dues certificate and your original property documents. Banks should return these within 30 days of full repayment, and you should check that the charge on the property is removed.
Test your own numbers
Open the prepayment calculator, enter your loan and try a lump sum, an extra monthly amount or both. It shows the interest saved, the time saved and the new EMI.