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Anand

Thursday, May 3, 2012

How to Handle Home Loan - Part Re-Payment


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.

Important:
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!!!

50 comments:

  1. Hi Anand,
    You have said that, when we do part repayment, the bank will prefer we go for the "Reduce Tenure" option.

    I have a floating rate home loan on which the bank has recently cut the Rate of Interest. I can continue to pay the same EMI in future as well. So, will the bank reduce the Tenure by default or the EMI?

    Please advise.

    Rohit

    ReplyDelete
    Replies
    1. Rohit,
      This is applicable even in cases where the rate of interest is cut on floating rate loans. Anyways it is a good idea to check with your bank to ensure that they select the Tenure reduction option for you.

      Best wishes...

      Delete
  2. Is it also possible to reduce the tenure by increasing EMI. I took a loan of 23 lacs at 9.5 % for 14 years in 2009. EMI is 24802. Can I increase the EMI to around 30,000 and reduce tenure. Considering that I have a decent income to support the payment of 30,000 EMI.

    Regards,

    Tarun

    ReplyDelete
    Replies
    1. Hi Tarun
      Yes, I think that should be possible. Why would the bank complain if you opt to repay the loan earlier

      However, there may be fees and charges in this case. So, talk to the bank and they should be able to help you

      Anand

      Delete
    2. This is possible , the extra amount above your EMI will be considered as monthly pre payment & accordingly your bank will reduce tenure

      Delete
    3. HDFC Bank representative recently told me that part payment less than twice the EMI will not be considered. I am currently paying an EMI of 65K per month which eventually means that less than 1.3 lakhs is not part payment.

      Is there any such clause or rule?Please help.

      Delete
    4. Anonymous,
      This kind of restrictions are set differently by different banks.

      For ex: One bank may allow you to repay as little as Rs. 5000 or Rs. 10000 while some expect at least Rs. 1 lac. Some banks allow multiple part payments in a year while some allow only one or two.

      It all depends on which bank you have taken your home loan from. If the HDFC Bank representative can show you written proof of this twice the monthly EMI as the minimum amount in the loan terms & conditions, there is not much we can do here.

      Check the loan agreement to see if such a clause is mentioned in the repayment terms & conditions. If not, then the bank cannot enforce such a rule.

      Anand

      Delete
    5. Hi,
      Thanks for the useful info, while doing part payment we cant do online transaction right.
      Though. We resident out of india, how can we do part payment? What are the required documents in hdfc to courier?

      Thangaraj

      Delete
    6. Hi - For doing part payment, you need to contact the bank. If you just do an online payment, the amount be considered as pre-emi which means, for the next many months, the bank wont deduct any EMI from your account. Contact your HDFC NRI Service Center in the country where you live and request them for the formalities. They can help you with that.

      Delete
  3. Hi Anand VijayaKumar
    Your blog is amazing
    Could you please what is the prepayment and partpayment clause in the sanction letter of home loan by a bank mean

    what do a credit manager see in your loan application

    Please help

    Regards Rahul singh
    Email-rahulsingh5525@gmail.com

    ReplyDelete
    Replies
    1. Rahul,

      1. Prepayment clause outlines the fees & charges when you fully repay your home loan before its tenure. Let us say you took a home loan last year for a 20 year tenure and then hit the lottery today and decide to close your loan - this clause will determine how much fee/penalty you pay the bank that gave you the loan.

      2. Part payment clause outlines the fees & charges when you repay a part of the home loan before its tenure. Let us say you took a home loan last year for a 20 year tenure and then got 5 lakhs from your father as inheritance today and decide to partly repay your loan - this clause will determine how much fee/penalty you pay the bank that gave you the loan.

      3. The credit manager sees things like your employment history, how much money you earn, value of your property etc. They try to see if you are a customer who will repay the loan properly. If they feel you have a history of defaulting on loans or dont earn enough to repay the EMI's they may decide to reject your loan application.

      Regards
      Anand

      Delete
  4. Hi Anand,

    I'm having plan not to keep my Home loan as long as my Tenure.Having thought og doing part payment yearly say 5 lakhs in that case whch option i hvae to choose EMI chnage or Tenure chnage? which one will be profitable. Note i'm not having any burden on paying same EMI.

    ReplyDelete
    Replies
    1. Niviea,
      I would say in that case, go for Tenure change. That will be better.

      Anand

      Delete
  5. I plan to pay a sum of 4 lac towards my housing loan as part-payment, since my house is still under construction, the bank said the 4 lac will be deducted from the amount disbursed till date, and not the entire loan amount. My loan amount is 46lac and amount disbursed is 30 lac so far.
    My question will this benefit me, or should I wait for the entire about to be disbursed and then do the part-payment?

    Thanks
    Ajay N

    ReplyDelete
    Replies
    1. Hi Anonymous,
      As your loan isnt fully disbursed, the bank can only deduct the prepayment from the amount disbursed till date. You can actually talk to the bank and have them reduce the loan amount from 46 lacs to 42 lacs instead of working out a prepayment because that may be cheaper in terms of your interest payments

      Alternately you can wait till the full amount is disbursed, keep this surplus as a fixed deposit and then do the part repayment to reduce the loan tenure.

      Anand

      Delete
  6. Hi
    My name is kumar , i had taken loan of 8.5 lac this year on sep 2013 , tenure of 25 years , i got a emi of Rs 8000 , i want to prepayment of Rs 1 lac , i want to know that they will deduct my principle amount or both and i don,t want to less my emi .

    ReplyDelete
    Replies
    1. Hi Kumar - When you do this 1 lac prepayment the amount will be adjusted only against the principal. After that, the bank is supposed to ask you whether you want to reduce your loan tenure or the monthly EMI. As customer you can choose between either two. As you want to pay the same EMI choose the reduce the loan tenure option.

      Remember that, the EMI cannot exactly be the same (sometimes due to numeric limitations while adjusting your principal/interest etc). However, you can expect the EMI to be around your current EMI of 8000 only. maybe 8100 or 7900 or so on...

      The bank cannot force you to choose either option. You can decide whichever option you want.

      Anand

      Delete
  7. hi anand,

    I have taken a loan from SBI bank in 2011. The total amount sanctioned was 30 lacs. By end of 2012 i got the possession of the house and could manage another 10 lacs from my own pocket and only got 20 lacs disbursed from the bank in total out of 30 lacs. The EMI for the total structure is around Rs. 30000 per month which i have been paying for last 2.5 years. Now the total principal as per last statement is 16.5 lacs. I want to reduce the overall EMI without changing the bank. Pls advise if this is possible and what i have to do for that.

    ReplyDelete
    Replies
    1. Hi amit - Yes, you can reduce the overall EMI without changing the bank by either of the two following methods:

      1. Alter the loan tenure. For ex: If your current loan tenure is 10 year and you want to extend it to 15 years, the bank will reduce the EMI accordingly. But, if your current loan tenure is already the max the bank offers (some banks offer 15 or 20 years as max tenure) then this option is ruled out
      2. Make a part repayment - If you make a part repayment (lets say 5 lacs) the bank will offer you two options - either to reduce the loan tenure or monthly EMI to offset this part repayment. You can select EMI reduction and retain the same tenure.

      Anand

      Delete
  8. Hi Anand,
    I have taken loan from X-bank & now I wanted to transfer my loan to Y-bank because of High rate of interest, but X- bank person is telling to pay full EMI 25000rs for the month which I have closed in 12th of that month, so please let me know whether I should get refund of remaining 18days EMI. When I asked bank person about any agreement or clause he refuses to answer. So let me know whether I can complaint to national housing board/consumer court.

    Thanks

    ReplyDelete
    Replies
    1. Hi Anonymous - A portion of the 25000 rupees goes towards interest and remaining goes to principal. Usually you are expected to pay-off the interest portion of the last month EMI in full. So, if the bank X has taken the full EMI and reduced the principal remaining by the extra principal amount you paid, I think that is perfectly fine.

      For ex: lets say in this months EMI principal is 15,000 and interest is 10,000, even though your loan was closed on 12th, the bank will expect you to pay the 10,000 interest. for 12 days principal will be Rs. 6000 (approx). So, when the final settlement/closure happened, if the overall remaining principal was reduced by an extra 9000 (because you paid 15000 instead of 6000) that is perfectly fine.

      If this 9000 is missing, then you can file a complaint to the Banking Ombudsman. Read this: http://anandvijayakumar.blogspot.com/2011/04/know-your-rights-banking-customer.html

      Anand

      Delete
    2. Anand, Thank you very much for valuable feedback

      Delete
  9. Hi Anand, Thanks for this Blog,
    I have taken a loan of 29 lacs from one of the bank in 2010 for 25 years and paying appr 27,600, i would like to reduce my tenure to 10 years and i will be paying one lakh every month as a part payment. If this is the case how much EMI would i be paying exactly after 2 years till the tenure, Thanks for your time.
    Siddarth

    ReplyDelete
    Replies
    1. Hi Siddharth,
      These kind of calculations depend on a lot of factors like which bank you have a loan with, what the rate of interest is, how they handle part repayment offset etc. I would suggest you visit your bank along with details of your planned part repayment and get the exact details of future payments.

      Best of luck
      Anand

      Delete
  10. HI ANAND.. nice blog..good advice.. it will help me in furthr decisions..:)
    But i want advice in a step back from repayment.
    I wanted to know that is it better to make repayments instead of investing the money?
    please give your deep insight to the question..
    what are the advantages of making repayments compared to further investments.
    Details: My dad have a house loan with 12% rate(festive actually,we didnt knew dat before). he's 53 years old and we are concerned about his health.
    So, what do you think we should opt for?
    Please reply...

    ReplyDelete
    Replies
    1. Shuvanshu - The decision on whether you do part repayment or invest changes from case to case. Since your father is 50+ and also since you have concerns reg. his health - I would suggest you repay and close off the loan. 12% is actually a high interest rate for home loan. These days banks are giving loans for rates around 10%

      Anand

      Delete
  11. Hi Anand, useful blog...Thanks for that. I have loan of 8 lakhs in HDFC. .I am paying 8000+ monthly....I would to pay 1 lakh on every year....whether It will reduce from my principle amount or Interest or both....is this good idea to reduce the loan amount or this would not give benefits by paying 1 lakh yearly....please advise. Thanks

    ReplyDelete
    Replies
    1. How long has your EMI been running and how much of this 8000 is principal and interest? can you tell me?

      Delete
  12. EMI starts on jan 2014 and interest rate is 10.25, bank is HDFC Ltd. ,....Total EMI per month is 8000+ which included principle nd interest....I would like to pay min 1 lakh on every up coming years whether it does help to reduce my overall principle amount...please advise

    ReplyDelete
    Replies
    1. Ramu - As the loan amount is low, if you consider the tax benefits you will get by continuing this EMI will be much higher than the interst amount you will end up saving by doing pre-payments of 1 lakh each year.

      I would suggest you invest this 1 lakh each year and get all your 80c section benefits and retire rich. My new book explains this concept with great detail and can help you retire as a crorepati. Do take a look here: https://www.distribly.com/product/1688?aid=15702

      Best wishes
      Anand

      Delete
  13. Hi,
    In 2011, I have taken loan of 21 lacs from LICHFL bank @10.7% ROI and tenure is 15 years. Currently i am paying Rs.23000 as EMI and expecting
    Rs .10000 monthly increment this year.
    which is best option..Increasing Increase EMI to 35000 or put 10000 in RD/mutual funds and pay lumsum amount as part payment after some months.
    please give your valuable suggestion..

    ReplyDelete
    Replies
    1. Saravanan - I think option B would be better. Plus - If you invest in tax saving instruments - you can also save a lot of income tax.

      have you checked out my book on Income Tax saving and retiring as a crorepati using just the Section 80C Investments? If not, i suggest you check that here: https://www.distribly.com/product/1688?aid=15702

      You can also purchase the book by paying in rupees. If you are interested, drop me an email.

      Anand

      Delete
  14. Hi Anand, I am Viswanadh, It is really a useful blog for folks like me who wants to reduce the home loan burden as soon as possible! Is there a link for home loan part payment calculator to check how much interest we are saving by paying how much lumpsump amount?

    ReplyDelete
    Replies
    1. No Viswanth, there is no such calculator present in this blog but am sure you can find one in the internet

      Delete
  15. And also i have one more question: I have taken a home loan of 14 lakhs in December 2012 with 13,600 EMI for 20 years. As i am in 30% slab category, i am saving some money by showing this interest in my organisation. I have some lump sum amount in hand now, is it suggestible to do some part payment for my home loan?

    After 1st year, i showed to my organisation that i paid around 1,40,000/- interest and i saved 42,000/-.
    Can you give your valuable suggestion?

    ReplyDelete
    Replies
    1. Viswandh, part repayment of a loan is a good idea. Can you continue to pay this 13,600 EMI moving forward? If so, ask the bank to reduce your loan tenure and this way you can continue your tax benefits as well.

      Delete
  16. hello Mr Anand,
    I am a defence officer and i have a loan from bank of baroda of 20 lacs from 12.5 years for which i have started repaying the bank on an EMI 0f 24500 approx. from april this year for a flat i took in agra(home loan and flat are on me and my mother's name and i am solely repaying the loan). My question is that since i am living in a government provided accomodation in another city, what kind of tax benefit i can avail from this home loan as this house will be vacant as i cannot give it to on rent.please advice.

    ReplyDelete
    Replies
    1. Sanket - As the second house is not rented out, you cannot avail any tax benefits. However, if you want, you can add a Notional Rent as income for tax returns purposes and avail the tax benefits corresponding to the home loan.

      I have published a book that can help you understand the indian tax laws and save a lot of tax. You can get more details here: http://anandvijayakumar.blogspot.com/p/books-by-this-blog-author.html

      Anand

      Delete
  17. Nice Article Anand! I have the below scenario...appreciate your inputs:

    I took a home loan in the year 2010 for a tenure of 300 months. Here are the details:

    Loan Amount: 29.5 Lacs
    Interest rate: fixed for 5 years @ 9.25% (I am close to this getting over now)
    Part Prepayments: Regular
    Remaining Principal currently: 8.5 Lacs
    Current EMI: 25000 pm
    Since I have other commitments I would want to reduce the EMI that I currently pay which is way beyond that I actually need to pay. I need the EMI to be reduced but the tenure to remain the same which is currently at 246.

    Please advise if I can approach the bank to reduce the EMI and keep the tenure unchanged as I have made part prepayments regularly (Principal reduced from 29.5 L to 8.5 L). I am looking to reduce the EMI to about 12K.

    ReplyDelete
    Replies
    1. Mahesh - Reviewing your loan tenure especially when you have been steadily repaying your EMI plus making part pre-payments. So, dont worry. Just consult your bank and talk to them. Usually banks wont have any problems reviewing your loan tenure as long as you still have at least 10-15 years until retirement.

      So, with 8.5 lakhs remaining, it would be easy to get the EMI to the number you have in mind. Talk to your bank and they will help you with it.

      Delete
  18. I wanted to find out how can one repay the loan early and what does this entail? Does it even make any sense to do this?

    ReplyDelete
    Replies
    1. You just visit your bank with the money (either cash or cheque) and then close the loan. Simple. Yes, closing a loan early means you will save a lot of money on interest

      Delete
  19. My question is....I have a existing home loan of 12 lakhs for 10 years and I am paying 16000 rs EMI. Now I am planning to take a topup loan on the same property of 15 lakhs for three years and another home loan of 60 lakhs for a new property.......Is takong two loans is fine.. ?

    I am planning to pay topup loan a down payment for the new property , than paying it back in 3 years and the start the EMI for new property.

    ReplyDelete
    Replies
    1. Is it possible? - It depends on ur income and whether the bank is willing to offer you two home loans

      Is it ok? - It depends on your income and expenditure and how you can manage it.

      Taking two loans is fine as long as you have enough income for the bank to grant the loan and that you repay it

      Delete
  20. Dear Anand...

    I have a loan of 22 lakhs for 10 years tenure and i am paying Rs:28900/- per month for the last 6 months. I have 2 lakhs now to pay as part payment against my loan and 1.5 laksh in the month of May 2016. What you suggest on this prepayment

    1 ) payment of 3.5 lakhs in the month of May as one payment or can i have two installment
    2 ) Should i reduce my loan tenure by keeping the same EMI as at present i have the capacity to pay the premium.

    ReplyDelete
    Replies
    1. 1. Your choice, You can do either ways. Just remember that for every instance the bank will make you visit the branch, fill paperwork etc.
      3. If you are comfortable paying this amount EMI each month, then reducing the tenure is the smarter option since you will be paying much less interest eventually

      Delete
  21. I made a part pre payment on the loan amount I have taken and wanted the EMI to be reduced, but during conversation with the bank official, forgot to mention that the EMI should be reduced. Now I see that the term has been reduced. Will it be possible for me to get this changed if I visit the bank again within a day or two of making this pre payment?

    ReplyDelete
    Replies
    1. You can try but the bank may not help because you should have mentioned it at the time of the payment

      Delete
  22. Hello,

    I have took home loan in Canara Bank R.S 14.0 Lacs @ 9.55 ROI for 20 years. Whenever i'm paying more than my EMI its considered as 'Advance Amount" only. The subsequent EMI is being deducted from that 'Advance amount'. I dont know why its not reflecting in principal. this is the way how it works? or how? can you guide me?

    ReplyDelete
    Replies
    1. I don't understand the advance amount concept. Every month EMI will contain both principal and interest components. Of course the first few years principal will be very low and every after paying full year EMI, the reduction in principal will be negligible but that doesn't mean it doesnt reduce. Ask for detailed statement and check

      Delete

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