Real Esate

Is it good to do Home Loan part payment ?

Most of us will take home loan for buying our dream home. Before taking loan itself, we start thinking of repaying the loan soon. Because we dont want  psychological  pressure by running loan for many years. If you have some extra cash with you as bonus or shift allowance, then is it good to part pay home loan or use that money for some other purpose? Here you go and read details about part payment.

How Part payment works

Part payment is the very useful option for the people who takes loan and we can pay small amount towards the payment of Principal.  Your monthly EMI consists of amount paying towards principal plus interest.  So when you do part payment amount will be reduced from outstanding principal amount.

Pavan has taken loan for 30 Lakhs for 20 years @ 10.5 % then your EMI will be approximately 30K and after end of 20 years Interest he pays is  40 Lakhs. You will be shocked by seeing the numbers. But its true. In this case interest  paying for loan is more than principal amount.

So to avoid paying huge amount at the end, better option is  part payment . If you pay just 5000 rs per month extra towards part payment, your total interest will drastically come down to 25 Lakhs. That is the power of Part payment.

Options available while doing part payment

When you do part payment there will be two option available for you.

1. Keep the EMI constant and reduce loan tenure

2. Reduce EMI and Keep tenure constant

Its always better to choose option1 of keeping your emi constant though you did part payment. It will help you reduce the interest component. So when you do part payment by choosing this option your loan tenure will come down , interns helps you to pay less interest.

Go for option 2 , in case you have some financial problems and not able to pay your EMI . If not always advisable to choose keeping EMI constant. By default banks also provides this option.

Part Payment Charges
From last year onwards, National Housing Board  removed penalty for floating rate interest loans . Some banks removed penalty of pre payment for both floating and fixed rate loans. Banks wont charge penalties if the amount your are paying is from your own source of income, not taken  from other banks.

home loan part  payment

Advantages of making part payment

As we seen above calculations, if you part pay little amount also, it will reduce your interest  rate drastically. Another point is in initial years of your loan , most of your EMI will go towards interest component. So start making part payment from initial years itself. Don’t wait to complete few years and then make huge amount towards part payment. Always advisable to start paying from start of your loan.

Important points  to remember:

1. Check the details with bank on when to start part payment. Usually most of the banks allow part payment after completing stipulated time, In case of ING vysya bank, you have to wait for 6 months after loan is disbursed to start part payment.

2.Check with your bank on number of part payments per year.Some banks allow 3 to 4 times of part payment  in a year .

3. Instead of getting confirmation on call, Always better to write to customer care on your queries like  penalty charges  other details in written communication via email.

4. If you are going to use the amount for part payment in some other investment to get more return than your home loan interest rate , rethink about part payment. But usually home loan interests rates are 10 % these days and there are no risk free options to get more returns if we invest instead of part paying.

5. Always advisable to get your loan amortization chart from the bank  after making part payment. In this chart you can check all details like outstanding principal left , tenure  about your loan .

Start saving some amount for loan part payment and plan to use your bonus for part payment.  So, are you going to do part payment? Your thoughts are welcome.

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About Sravanthi

Hi ..I am Sravanthi, working in IT field and i'm more passionate about managing personal finance. I am writing this blog to help people especially salaried employees to invest their money wisely . Check out the articles ..happy reading :)

Discussion

7 thoughts on “Is it good to do Home Loan part payment ?

  1. Good post, Part payment is definitely recommended. However since interest is tax free (up to 1.5L) do you think it can break even if I save the bonus amount and do a fixed deposit instead of part payment ?

    Posted by Neil | March 19, 2013, 4:46 pm
  2. Hi Neil,

    The returns on Fixed deposits are very less after tax deduction. Right now banks are giving 10% interest on FD’s . If you comes under 20 % and 30 % bracket, your actual returns will be 7 -8 % only, which returns are less than your home loan interest . So here you need to face the loss if you keep your bonus amount in FD’s.

    Thanks,
    Sravanthi

    Posted by Sravanthi | March 20, 2013, 5:14 am
  3. prepayment is not a wise option. Finding out an alternate FD which yields same roi as the loan is always best.

    Posted by pradeep | March 20, 2013, 7:04 am
    • Hi Pradeep,

      Fixed deposit returns are not tax free, so after tax deduction, your returns on FD will be around 8 % if you comes under 20 to 30% bracket. If you consider other investment options like mutual funds, it consists of some risk if you consider for short term. So for risk free there are limited options to earn more return than house interest rate.

      Thanks,
      Sravanthi

      Posted by Sravanthi | March 20, 2013, 9:12 am
  4. Thanks Sravanthi for this useful article.

    Posted by Shiju | March 20, 2013, 3:22 pm

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