Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount.
Also, something which cannot be quantified is the mental tension that one has to bear for the longer loan duration. Secondly, the loan borrower also carries the risk of increase in home loan interest rates over the longer period of time. So the shorter the loan period, the less you pay back to the bank, the less risk you take and the less tension period you have.
Have a look at these nos. Imagine you took home loan at 10% for an amount of 25 Lakh Rs. If you repay the loan in the mentioned time-periods, the lower money you pay back to the bank:
Loan Period - Total Amount Repaid
-----------------------------------
1 year - 26,37,477
5 years - 31,87,057
10 years - 39,64,522
15 years - 48,35,723
So the earlier you payback the better because the lower amount you have to repay. Please note that the above does not contain pre-payment charges
Related: Home Loan Tax Benefits and All Home Loan Articles
How does change in interst rate affect the prepayment of home loan?
This is the whole crux of the story - and is the central theme of this set of articles about which home loan you should take - one with prepayment charges or one without any prepayment charges.
Assume that you have taken a home loan from a bank for 25 Lakh Rs. for a period of 15 years at the interest rate of 10% per annum. So things go smoothly for a period of 1 year i.e. the home loan interest rate remains at 10% for a year and after that interest rates start to increase. In another 1 year, they shoot upto 12% per annum. With every change in interest rate, your bank will either increase the EMI amount or increase the loan tenure, or a mix of both. The first and the third scenarios are rare - almost all the banks by default increase your loan tenure.
As explained in previous section, increasing the loan tenure has adverse effect for the borrower both in terms of amount of loan to be repaid to the bank and the longer duration for EMI payments.
Now add to it the strict conditions applied by some banks and NBFC which do NOT allow prepayment of home loans, or charges heavily on prepayment charges. What happens in this case? Your loan tenure has increased - means you need to pay same (or more EMI) for a longer period of time. You can avoid that if you prepay some portion of your loan, but that may not be allowed by your home loan bank or NBFC or it may take prepayment charges for the same. So either way, you have to take the hit - either pay prepayment charges or pay more to the bank in long durations of repayment or higher EMI's.
Now what is the benefit if you take home loan from a bank which does not have any pre-payment charges?
Consider the same scenario discussed above - the interest rates increased causing a longer duration for your EMI payment or increased EMI's. Suppose that you have received some bonus amount from your employer, or you take money from your parents/relatives or sell any property and use that money to prepay your hoam loan. You can do so easily without any problems and without any pre payment charges - such early payments or prepayments of homeloans will ensure that your loan duration remains less and also the total amount of money to be repaid to the bank remains low.
So, definetely a bank offering home loan without prepayment charges is better than the one which is offering home loan with prepayment charges or limits on prepayment.
But do check in case the home loan offering bank or NBFC is having any hidden conditions attached.
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