How to prepay a Rs 40 lakh home loan of 15 years in 7 years and save in lakhs?
No matter what your loan amount is, prepayment at regular intervals will complete the loan much earlier than the original tenure. Moving into your own home is always a pleasant feeling. More so, if you have been paying rent for all these years. Many of those who are paying rent look forward to arranging a down payment amount and taking a home loan to finance the real estate property. As against paying rent to a landlord, which is a sunk cost, it is better to pay home loan EMIs, as the home equity is 100 per cent once the loan ends. But, by the time you complete the home loan, which typically is for a longer period of 15-20-30 years, the interest cost runs into a sizable amount as a ratio of the loan amount. Sample this  Assuming an interest rate of 8.5 per cent, throughout the tenure, on a home loan of Rs 40 lakh, you will end up paying a total interest amount of approximately Rs 31 lakh. One, is to scout for a lender which offers you the lowest home loan interest rate and the other is to have a prepayment plan in place. New borrowers can ask for EMIs based on their loan amount and tenure from 2-3 lenders and then decide. If you already have a home loan, you may switch to another lender offering a much lower rate of interest or even ask an existing banker to lower the rate. Currently, most banks are lending home loans linked to RBI repo rate and such loans are called RLLR, while earlier loans were linked to banks MCLR. Whether you are a new borrower or an existing borrower, keep prepaying the loan so as to finish the loan as early as possible. Case study: Assuming the loan outstanding is Rs 40 lakh, the EMI is about Rs 39000 for a 15-year (180 months) loan. The total interest cost if the loan runs through till the end is about Rs 31 lakh. Now, lets say, one keeps repaying an additional amount of Rs 25,000 ( Rs 3 lakh annually) each month, then the loan will finish in 7 years or 84 months. The total interest cost by repaying early is about Rs 14 lakh, resulting in a savings in interest amount of almost Rs 17 lakh! The actual amount that you need to complete the loan early will depend on your loan outstanding, remaining tenure etc. There are several home loan prepayment calculator that may help you in reducing interest cost. While sanctioning a home loan, your home loan eligibility depends on your repaying capacity. Most lenders lend an amount on which the EMIs is about 40-45 per cent of your take home income. Herein lies the road to build a prepay plan of your home loan. No matter what your loan amount is, prepayment at regular intervals will complete the loan much earlier than the original tenure. Besides paying EMI, you need to keep pre-paying principal on a regular basis. Set aside a certain sum each month, quarter or on an annual basis. There is no fixed rule to repay, however, some banks may allow repayment only on a monthly or annual basis. You may prepay a fixed sum on a regular basis thus reducing the loan outstanding. Lower the loan outstanding, lower will be the interest that you will pay. The prepayment done in the earlier years is better than doing it in the later years. This is because, even though monthly instalments in home loan are equated and fixed amount, the interest portion in EMI is more in the initial years of the loan. So, prepaying in the initial 1-5 years can help you save a few lakhs of the loan amount. You may have to cut-down on some discretionary household expenses for which creating a home budget will also help. The idea is to prepay the loan early so that interest cost is kept at minimum. If your spouse is working, the savings may be diverted towards home loan repayment as well. Any bonus, increment that you may receive may also be used to repay the home loan outstanding. But, before you venture out to repay, make sure you have adequate emergency funds and other savings earmarked for your long term goals such as childrens education, marriage and retirement.