What is Part Payment on Home Loan – Uses and BenefitsDecember 30, 2022 . Home loans . 10 min read
Part payment on home loan means paying a large amount of the principal amount irrespective of what your EMI is.
Suppose you have taken a loan of ₹50 lakhs that you have to repay in 20 years. This period of 20 years is called your tenure. The principal amount plus the interest that you pay on your home loan is divided among 240 monthly installments (20 years have 240 months). You arrange your finances such that every month you can pay the EMI for the next 20 years.
Then one day you may come across some extra cash. Maybe it’s a bonus. Maybe a policy has matured. Maybe you have inherited money. Maybe among your documents you have discovered a small property you didn’t know you owned and you can sell it now for a profit.
Whatever the reason is, you have extra money and you would like to make a part payment on your home loan. Since there is no penalty on part payment, you can opt to make this payment on your home loan and reduce your tenure as well as the total amount that you pay to the bank or the finance company you have taken your home loan from.
Let’s use the same example given above. You have taken a home loan for Rs. 50 lakhs for a tenure of 20 years with an interest rate of 7.5%.
If you make a part payment of Rs. 5 lakhs at the end of the fifth year, you can almost save an interest of Rs. 8.8 lakhs. The principal amount you owe to the bank will be reduced and hence, you may pay a lower interest rate than you were paying previously. You can also choose to reduce your tenure so that you pay fewer EMIs.
Why does it make sense to make a part payment on your home loan apart from the fact that you will pay less interest and your tenure might reduce?
Although you may think that your financial future is secure over the next 20 or 30 years, you can never be sure of the economy. Jobs are being threatened. Businesses are going under. You may face health problems that you cannot predict right now.
As your family grows, there will be other financial responsibilities for you to take care of. You will need to think of retirement and higher education for your children. In traditional Indian families’ parents also need to think about marrying their kids. These are all financial responsibilities that younger couples usually don’t think about when they are taking a home loan. The sooner you reduce your principal amount, the better off you will be later on.
Other benefits of making a part payment on your home loan
Many people wonder whether it makes more sense to invest the little extra money that you have come upon or if it is more financially prudent if you make a part payment on your home loan. Ultimately, how much money you save in both the options should enable you to decide what direction you should follow.
Although you have already seen some benefits of making a part payment on your home loan above, here is a compiled list of the benefits:
- Increased equity: You build equity in your property as you pay off your home loan. The less money you owe against your home, the larger percentage of the home you own, which makes it easier in future for you to sell in case you want to.
- Improved credit score: It can improve your credit score if you make part payments on your home loan. You can make multiple part payments. When you make such payments, you demonstrate to the credit agencies that you are eager to repay the amount you have taken from them.
- Shorter loan term: Your tenure will reduce as you have less money to pay back. If you regularly make part payments on your home loan, you can potentially pay off your loan years ahead of schedule.
- Reduced interest: Since you are reducing your loan principal, there will be less money to pay interest on.
- Lessened financial burden: Your principal amount will reduce. Your interest will be reduced. You can renegotiate with the bank and reduce your EMIs. This will reduce the monthly financial burden on you and your family.
- Increased sense of empowerment: You have a stronger hold over your finances as you proactively make part payments on your home loan. By paying off your home loan faster, you can see your progress and feel good about the steps you are taking to become debt free.
- Potential for refinancing: Part payment of your home loan improves your credit rating. It makes you a more attractive candidate for refinancing. You may be able to refinance your home at a lower interest rate.
Making a part payment on your home loan is an excellent way of saving interest in reducing your tenure. As mentioned above, it isn’t necessary that you make a part payment on your home loan only once. Whenever you come across some extra cash that you can spare, you can make a part payment. Of course, you need to evaluate whether investing the money somewhere else will help you save more or should make the part payment. Before deciding, you should carefully weigh your options.
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