Should You Prepay Your Home Loan - IndianMoney.com

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Should You Prepay Your Home Loan:

 

You have availed a home loan of INR 40 Lakhs .You pay an interest of 11% a year .The tenure (Time you repay your home loan) is 20 years.

Your home loan break up is as follows:

Year	EMI (Year)	EMI Principal(Year)	EMI Interest(Year)	O/S Balance
1	495450	58,333	437,117	3,941,667
2	495450	65,084	430,366	3,876,583
3	495450	65,084	430,366	3,876,583
4	495450	81018	414432	3722950
5	495450	90,393	405,057	3,632,557
6	495450	100,853	394,597	3,531,704
7	495450	112,524	382,926	3,419180
8	495450	125,545	369905	3,419,180
9	495450	140,073	355,377	3,153,562
10	495450	156,282	339,168	2,997,280
11	495450	174,367	321,083	2,822,913
12	495450	194,544	300,906	2,628,369
13	495450	217,057	278393	2,411,312
14	495450	242,174	253,276	2,169,138
15	495450	270,199	225251	1,898,939
16	495450	301,466	193,984	1,597,473
17	495450	336,351	159099	1,261,122
18	495450	375,273	120,177	885,849
19	495450	418,699	76,751	467,150
20	495450	467,150	28,300	0

 

If you take a look at this table you will notice that most of your EMI payments on the home loan go towards the interest.

In the first year you pay:

EMI (INR 495450 ) = INR 437117 (Interest) + EMI (Principal)  INR 58333

 
Hardly anything you pay goes towards repaying the principal on the home loan.

 

What happens if you prepay your home loan?

If you observe the table only 15-20% of what you repay initially goes towards repaying the Principal on the home loan. Most of your money goes repaying the interest on the home loans.

If you prepay your home loans in the initial years the interest you pay on the home loan comes down drastically.

The adjusted EMI’s will have a higher principal component and a lesser EMI interest component.

The EMI’s you now pay on the home loan will go towards your principal repayments. Your home loan will disappear pretty quickly and you are the true owner of your house.

Observe the EMI (Principal) in the table and you will see most of the repayments towards the principal are in the last few years.

If you prepay your home loan the loan sure disappears quickly. 

Is it in your best interest to prepay the home loan?

 

You get tax benefits by availing a home loan. Your repayment of the principal amount of the home loan (EMI Principal) up to INR 1.5 Lakh per annum is eligible for a tax deduction under Section 80 C.

You get a tax deduction on the interest portions (EMI interest) you repay towards your home loan up to INR 2 Lakhs under Section 24 B. Your house/property needs to be self occupied. (You reside in the house).

If you prepay your home loan the EMI (Interest) component on it will disappear pretty quickly. You will not be able to avail any tax benefits on the interest component of your home loan.

You can avail a pretty steep benefit of INR 2 Lakhs per annum on the interest portion of your EMI on the home loan, You could continue to get a tax benefit on the EMI (Principal) of the home loan. This is INR 150000 a year under Section 80 C and not much of a tax saving.

If you want to avail tax benefits on your home loan (save on your taxes) then prepaying your home loan is definitely not a good idea.

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