Planning for Home Loan Prepayments

In the last post we have discussed the importance on making loan prepayment early on, as “Nearly 75%-80% of the EMI goes towards purely towards the interest during the first 3-5 years of your loan”. But the main question how to plan for prepayments when you are already paying the home loan EMI? 


Be Smart, plan for it!

While there is no direct answer to this question, but there definitely are a few ways in which it can be achieved.

1.      Create a RD towards accumulating the prepayment amount

You must have heard about Recurring Deposit which is commonly known as RD. RD is a unique term deposit offered by all the banks which offers flexibility and ease of investment to users. Most of the banks offers RD for a term of a few months to 10 years. You can invest even smaller amounts like 1000 Rs to start with and it also allows premature withdrawals if required.

I suggest creating a RD for a period of 12 months’ worth a maturity value that is equal to or more than 3 x EMI value.

Considering the same example from the last post here is what you can do:
Loan
RD
Amount: ₹ 50,00,000 (50 Lakh)
ROI: 9%
Term: 20 Years
EMI: ₹ 46,746
3xEMI = ₹ 1,40,238
Monthly Investment = ₹ 12,000*
ROI of 6.5%
Maturity Value = ₹ 1,49,000*

Tip: Please remember to setup a standing instruction, so that the fixed amount of money will be credited from your savings/current account into your RD account every month and you don’t have to do it manually.

2.      Increase EMI by 5 to 10% per month every passing year

Another way to achieve similar results is by increasing the EMIs by a smaller % every passing year. With the increase in EMIs, you start re-paying the loan a little bit more than what you would have done with your default loan EMIs.

Again considering the same example from the last post, instead of EMI of ₹ 46,746, you can consider paying ₹ 47,746 or ₹ 48,746 per month. The additional amount of 1000 or 2000 paid per month reduces your loan liability by the same amount every month. And the overall results can be surprisingly pleasant.

Here is an illustration of what will happen if you increase the EMI at the end of 1st year
EMI Increase
Interest Saved
Tenure Reduced
₹ 1000
₹ 3,40,000
12 Months
₹ 2000
₹ 6,40,000
23 Months
₹ 3000
₹ 9,00,000
33 Months

Here is another illustration.  of what wonders it can do for you if you increase the EMI at the end of 1st year
EMI Increase
Starting from
Interest Saved
Tenure Reduced
₹ 1000
2nd year
₹ 3,40,000
12 Months
₹ 2000
3rd year
₹ 5,60,000
21 Months
₹ 3000
4th year
₹ 6,80,000
27 Months

So bemoneywise and start home loan prepayments today!!!

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