How to Partially Prepay Your Home Loan: Step-by-Step Guide

Getting a home loan sometimes seems like a very long road. Those long years of EMI, sometimes it feels like a never-ending burden. However, did you know there is an easy way out? The best way to reduce the amount of your loan quickly is by paying part of the home loan in advance, and thus saving interest. We shall discuss partial prepayment of a home loan in this blog and try guiding you in a better decision about this process.

Partial prepayment refers to paying part of your home loan before the scheduled repayment time. This does not mean you are paying off the whole loan at once, but only part of it. By doing this, you lower the total loan amount, which helps reduce the interest you pay over time.

Partial prepayment is great because it gives you flexibility-you don't need to wait until you can pay the full amount. Even small payments can help!

1. Know the Terms of Your Home Loan

Before you begin partial prepayment, you have to know how much is allowed in your home loan terms and conditions. Some will charge a prepayment fee, while others can allow partial payment of an amount before the year ends. Most banks allow 25% of the loan balance without fees, but it pays to double-check with your lender just in case.

2. Evaluate Your Current Financial Situation

Partial prepayment is a good thing, but always make sure you have enough for other necessary expenses. It could be because of a bonus, inheritance, or some savings. But not from your emergency funds - you want to make sure you have enough funds set aside in case of emergencies.

3. Communicate with Your Lender

After you have decided on the amount you want to prepay, you will have to contact your lender. You can do this through the website, by calling the customer service, or even by visiting the branch. Just let them know the amount you want to prepay. You may have to fill out a form for this, but the lender will guide you through it.

4. Pay

Once you are done with the paperwork, then comes the payment. In most cases, your lender may allow you to make it online or through bank transfer. Once the payment is made, it will automatically go to the main amount of your home loan. Remember to keep a record of this payment for future reference.

5. Get Your Amortization Schedule Updated

After you make the prepayment, your lender will alter the balance of your loan. The next step is to obtain a new amortization schedule (the breakdown of principal and interest payments) that shows the new loan amount. This will help you see how much you are saving on interest and how your repayment term might change.

6. Determine Future Prepayments (Optional)

If you are able to continue prepaying, you can add further prepayments later. Prepayment increases the speed with which you pay off the loan. It is a less structured way of reducing the amount borrowed without getting locked in.

1. Reduces Your Loan's Interest Expense

This would be paying part of your loan earlier, thereby reducing the major amount. In addition to that, it means that you will also pay lesser interest throughout the loan time. You can save more in terms of interest when you pay in advance as early as possible.

2. Pay Less for Your Loan Period

Prepayments can reduce the overall loan tenure, thus making you debt-free sooner. Rather than carrying the same EMI throughout the entire term, your lender may choose to reduce the tenure and enable you to pay off the loan much quicker.

3. Boost Your Credit Score

Regularly prepaying your home loan can improve your creditworthiness. A smaller outstanding balance and a consistent repayment record show your financial discipline, which can lead to a better credit score. A good credit score opens doors to more favourable loan offers in the future.

4. Enjoy Financial Flexibility

Making a partial prepayment allows you to adjust your loan according to your money situation at the moment. If you receive extra money or have saved some, you can use it to lower your remaining balance. You also have the option to decrease the EMI or to make the loan period shorter depending on what suits you best.

• Check for Prepayment Charges: Some lenders charge a fee for partial prepayment, while others allow a limited amount without any charges. Be sure to confirm the terms with your bank.
• Maintain Your Emergency Fund: It’s tempting to use all your savings to prepay, but don’t forget to keep some money aside for emergencies.
• Tax Considerations: Paying off your home loan early could lower the interest you pay, which may affect the tax benefits you get. It’s a good idea to talk to a tax consultant if this worries you.

One of the best methods of paying your home loan to lower your debt quickly, save some interest, and become financially free is to pay part of it early. It's a pretty simple yet effective way for making your loan more useful for you.

If you are not sure how partial prepayments will change your home loan, contact us at AU Small Finance Bank. We are always here to help you with your home loan and provide solutions that fit your financial needs.