What is part payment on home loan?

April 4, 2023 . Home Buyer's Guide . 10 min read

Purchasing a home is a significant milestone, and for many people, a home loan is the only way to achieve this dream. However, paying off a home loan can be a long-term financial commitment that lasts for decades. As borrowers make regular payments towards their home loan, they may find themselves in a position where they have additional funds and wish to reduce their debt burden. This is where part payment on a home loan comes into play. By paying off a substantial portion of the home loan amount before its tenure, borrowers can reduce their total interest burden, thereby saving a significant amount over the entire loan tenure.

In this blog, we will explore in detail what part payment on a home loan means, its benefits, and when borrowers should consider opting for it.

Understanding part payment on home loan?

Part payment on a home loan refers to the act of repaying a significant portion of the outstanding principal amount of a home loan before its scheduled tenure. This is usually done to reduce the overall interest burden on the loan and/or to reduce the tenure of the loan. The borrower can make a partial repayment of the loan through various methods, such as making a lump sum payment or increasing the regular EMI payments. The specific terms and conditions for making a part payment may vary depending on the financial institution, and borrowers should contact their lender to understand the options available to them.

Difference between part payment and pre payment

Although both part payment and prepayment involve paying off a portion of a home loan before the end of its scheduled tenure, they are not the same thing. It involves paying back a significant portion of the outstanding principal amount, while prepayment involves paying off the entire loan amount, including the interest.

Part payment is often made to reduce the overall interest burden on the loan and lower the monthly EMIs, while prepayment results in the complete closure of the loan. It’s important to note that prepayment may be subject to prepayment charges, which is a fee levied by the lender for paying off the loan early. On the other hand, part payment may or may not attract any additional charges, depending on the criteria of the loan agreement.

Advantages of part payment

Part payment on a home loan can be a smart financial move for borrowers, offering several advantages that can help reduce the overall cost of the loan and improve their financial situation. These advantages include:

●      Reduces interest burden

By making a part payment on a home loan, borrowers can reduce the outstanding principal amount, which leads to a reduction in the interest burden. This results in lower EMIs, which can provide significant financial relief.

●      Saves money

With lower EMIs, borrowers can save money each month, which can be used for other purposes or invested elsewhere to earn returns.

●      Shortens loan tenure

By reducing the outstanding principal amount, borrowers have the option to maintain the same tenure and reduce their EMIs or maintain the same EMI and shorten the loan tenure. By opting for the latter, borrowers can pay off the loan sooner, which can result in significant cost savings in the long run.

●      Improved credit score

Making a part payment on a home loan can help improve a borrower’s credit score by reducing their overall credit burden. A higher credit score can help borrowers secure future credit and provide a sense of financial security.

●      Helps with financial planning

By reducing the loan burden, borrowers can plan their finances more effectively, and it can provide them with more flexibility in their monthly budget.

When should you opt for part payment?

Opting for a part payment on your home loan may turn out to be a smart financial move, especially during the initial phase of the loan. This is because during the initial stage, a significant portion of the EMIs goes towards paying off the interest, while only a small portion goes towards the principal amount. By making a part payment during this stage, borrowers can reduce the outstanding principal amount and reduce the interest burden substantially. This can result in significant cost savings over the entire loan tenure.

On the other hand, making a part payment during the later stages of the loan may not have as much of an impact on the interest burden. It’s important to carefully evaluate your financial situation and consult with your lender to determine the best time to make a part payment on your home loan. In this way, borrowers can take advantage of the benefits of part payment and save money in the long run.

Conclusion

Part payment on a home loan is an effective way for borrowers to reduce their debt burden, save money on interest payments, and achieve financial freedom faster. By making a lump sum payment towards the principal amount, borrowers can lower their EMIs or shorten their loan tenure, providing them with greater financial flexibility and control. However, before opting for part payment, it is crucial to assess your financial situation and understand the criteria of your home loan, as well as any associated fees or penalties.

If you’re in the process of purchasing a home, HomeCapital can provide assistance with your home down payment and stamp duty and registration costs. With interest-free credit of up to 50% of the down payment amount, HomeCapital can make homeownership more accessible, helping you achieve your dream of owning a home.