Part Re-Payment on Home Loans - Isn’t this something we all intend on doing right from day one when the Home Loan is even applied? We tell ourselves, if I get a bonus from my employer, I will use it to part repay my Home Loan. That is a Novel Idea. But, have you given a thought on how you want to proceed with it?
Let us say your Home Loan is worth Rs. 50 lakhs and you have a surplus of Rs. 5 lakhs with you right now and plan on using it to part repay your loan. The Bank will give you two options now
1. Reduce the Monthly EMI of your Loan & Retain the Tenure
2. Reduce the Tenure of the Loan & Retain the EMI
Which one would you choose???
The purpose of this article is to help you make that decision.
Reduce the Loan Tenure or Reduce the EMI
This is a very easy decision to Make. However, it won’t be good if I just told you which one is good. You need reasoning - don’t you?
Positives about option 1 - Reduce the Monthly EMI
1. The Burden on your Monthly Budget will be lower
2. You will have more surplus cash every month to utilize for other expenses
Positives about option 2 - Reduce the Loan Tenure
1. The Loan will be repaid well in advance
2. The Interest you Repay the Bank will be Much Lower
Which one would you Choose? I would choose "Option 2". In fact, even the bank will suggest the same. Are you Surprised???
Yes. By Default, banks will offer the option of Lowering the Loan Tenure by retaining the same EMI. This is because, any change in EMI requires a lot of Additional Paperwork.
From the Customer's Perspective - Below is how Reducing the Tenure will be useful. Let’s say you have taken a 20 year Tenure Home Loan for Rs. 50 Lakhs where your EMI works out to approx. Rs. 50,000 per month.
EMI Per Month = Rs. 50,000/-
Repayment Per Year = Rs. 6,00,000/- (6 Lakhs)
Repayment Over 20 years = Rs. 1,20,00,000/- (1.2 Crores)
Let’s say you Repay 2 or 3 lakhs now and retain your original EMI & Reduce your Loan Tenure by 1 year, you are saving 6 lakh rupees. Would you consider this a saving or saving Rs. 2000 or so every month in EMI???
Note: The Exact Amount Saved will depend on your EMI and Loan Tenure. Also, in case of Part Loan Repayments, the bank will offset the Principal portion of the loan and advise you on the Revised EMI or Loan Tenure. In either case the number is dependent purely on your Loan Amount and Rate of Interest. The Above example is just an illustration.
A Very important point about Choosing Option 2 is "Affordability". Can you afford to continue to pay the same EMI as before? If you are in a financial crunch and could use some extra cash through reduced EMI, then go for Option 1. Don't compromise on your peace of mind just to reduce your loan tenure by 1 or 2 years. That reduced tenure is going to come only 10 or 15 years from now. Think about what is happening to you right now and start worrying about 15 years from now later...
Happy Home Loan Repayment!!!