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In India, the concept of prepaying a home loan is gaining traction among homeowners who are looking to save on interest and reduce their loan tenure. This detailed guide explores the ins and outs of LIC home loan prepayment calculator, including practical examples, benefits, and considerations to help you make an informed decision.
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How Credit Dharma’s LIC Home Loan Prepayment Calculator Works
Here’s a simplified explanation of how the LIC HFL home loan prepayment calculator from Credit Dharma operates, using a practical example:
A borrower took a home loan from LIC HFC. Here’s a breakdown of the loan amount:
1. Initial Loan Details
- Loan Amount: ₹1,00,00,000 (₹1 crore)
- Interest Rate: 9% per annum
- Tenure: 20 years
- EMIs Paid: 12 months
- Prepayment Amount: ₹2,00,000
2. Loan EMI Calculation
The Equated Monthly Installment (EMI) can be calculated using the formula:
EMI = P x R x (1 + r)^n / ((1 + r)^n – 1)
Where:
- P= Principal loan amount = ₹1,00,00,000
- R= Monthly interest rate = 9% annual rate / 12 months = 0.75% = 0.0075
- N = Loan tenure in months = 20 years × 12 = 240 months
Plugging in the values:
EMI = [1,00,00,000×0.0075×(1+0.0075)^240]/ [(1+0.0075)^240 – 1]
Solving this gives an EMI of approximately ₹89,973.
3. Outstanding Principal After 12 EMIs
After paying 12 EMIs, the outstanding principal amount is reduced.
The outstanding principal is not simply P−12×EMI because the EMI includes both principal and interest components.
Using the amortisation schedule for the first 12 months, we can calculate the outstanding principal amount is ₹97,96,352.
4. Impact of Prepayment
- Prepay Amount: ₹2,00,000
When a prepayment of ₹2,00,000 is made, it directly reduces the outstanding principal. So, the new outstanding principal is:
New Outstanding Principal = 97,96,352−2,00,000 = ₹95,96,352
5. Effect on Interest and Tenure
- Current Interest Amount (Without Prepayment): ₹1,15,93,423
- New Interest Amount (With Prepayment): ₹1,07,45,692
- Interest Saved: ₹1,15,93,423 – ₹1,07,45,692 = ₹8,47,731
Note: The prepayment reduces the interest burden because the interest is calculated on the outstanding principal, which is now lower due to the prepayment.
6. Change in Loan Tenure
- Original Tenure: 20 years
- New Tenure: 18 years
The reduction in the principal amount, due to prepayment, allows for the loan to be paid off sooner if the EMI amount remains the same.
7. Remaining EMIs
- Original EMIs Remaining: 240 (total) – 12 (paid) = 228 EMIs
- New EMIs Remaining after Prepayment: 216 EMIs
The prepayment and reduction in tenure result in a reduction of 12 EMIs from the remaining schedule.
8. Summary of Calculations
- Prepayment of ₹2,00,000 reduces the outstanding principal.
- This leads to a reduction in the total interest paid over the loan’s life by ₹8,47,731.
- The tenure is reduced by approximately 2 years, equating to 12 fewer EMIs.
What Does Prepaying Your Home Loan Entail?
Prepaying your home loan means making payments that exceed your scheduled monthly installments, directly reducing the principal amount. This can be strategically done in several ways, each suitable for different financial situations.
Methods of Prepaying Your Home Loan
- Biweekly Payments: This involves dividing your monthly payment in half and paying it every two weeks. Since there are 52 weeks in a year, this results in 26 half-payments or 13 full payments annually, essentially making an extra payment each year without a significant monthly burden.
- Extra Payment Annually: Making an additional payment once a year can significantly shorten your loan term and decrease the total interest paid. This can be timed with receiving annual bonuses or other predictable income.
- Lump Sum Payments: Whenever you come into extra money, such as from an inheritance, bonus, or other windfalls, applying a substantial amount towards your mortgage can drastically reduce the principal and subsequent interest.
Factors to Consider Before Prepaying a LIC HFL Home Loan
While prepaying home loans seems lucrative, borrowers must evaluate certain aspects beforehand:
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Benefits of LIC Home Loan Prepayment
- Interest Savings: The most compelling benefit of prepaying your mortgage is the interest amount saved. Since interest is calculated on the principal amount, reducing principal early in the loan term can result in significant savings.
- Equity Building: Faster repayment increases your home equity quicker. This is particularly beneficial if you’re planning to leverage your property for investments or other financial needs.
- Debt Reduction: Lowering your principal early reduces your debt burden, improving your debt-to-income ratio—an important metric if you plan to secure further financing.
Considerations Before Prepaying Your Home Loan
- Financial Flexibility: Allocating extra funds to your mortgage means these funds will not be available for other investments. Homeowners should ensure they have sufficient liquidity and are not compromising on other financial goals, such as retirement savings.
- Prepayment Penalties: Some lenders might impose penalties for early repayment to offset their loss of expected interest revenue. It’s crucial to check your loan agreement for such clauses before making extra payments.
- Opportunity Costs: The funds used for prepayment could potentially yield higher returns if invested elsewhere. The decision should factor in the potential returns from other investments relative to the interest saved on the mortgage.
LIC HFL Foreclosure Charges
Foreclosure charges, also known as prepayment penalties, are fees that some lenders charge when a borrower decides to pay off their home loan early.
These charges are intended to compensate the lender for the loss of expected interest income due to the early termination of the loan. Here’s a general overview:
Types of Home Loans and Foreclosure Charges
Floating Rate Loans:
Residential Loans:
- As per the guidelines of the Reserve Bank of India (RBI), there are no foreclosure charges for individual borrowers on floating rate home loans.
- This means if your home loan interest rate varies with the market conditions (floating rate), you can prepay your loan partially or fully without any penalties.
Fixed Rate Loans:
Individual Borrowers:
- Prepayment through Refinance or External Borrowing: Some lenders may impose a prepayment penalty.
- Prepayment from Own Sources (e.g., savings, windfall gains): Many lenders typically do not charge a prepayment penalty.
Non-individual Borrowers (e.g., companies, trusts):
- Loan Type: Penalties may apply to both fixed and floating rate loans.
- Penalty Rate: Varies depending on lender’s policy.
Typical Foreclosure Charges
- Charges range from 1% to 3% of the outstanding or prepaid amount.
- Some lenders apply a sliding scale based on loan maturity.
Is Overdraft a Better Option than Prepayment for You?
What is an Overdraft?
An overdraft facility on a home loan account allows depositing surplus funds, which reduces the outstanding principal and the interest charged. This facility is beneficial because it provides liquidity—surplus funds can be withdrawn at any time.
While it helps save on interest costs, it’s important to note that overdraft facilities might come with higher interest rates and additional fees compared to standard loans.
Prepayment vs Overdraft: What Should You Opt For?
Option | Features | Benefits | Good For |
---|---|---|---|
Prepayment | Directly reduces principal Saves on interest Potentially shortens loan tenure | Long-term interest savings Accelerates debt freedom | Borrowers seeking long-term savings and early debt clearance |
Overdraft | Allows deposit and withdrawal of surplus funds Interest calculated on reduced principal | Flexibility in fund access Saves interest while funds are deposited | Borrowers needing liquidity and flexibility with continued savings |
Considerations
- Financial Stability: Overdraft might be more suitable if you expect fluctuating income or expenses.
- Interest Rates: Compare the potential interest savings against the higher costs associated with an overdraft facility.
- Financial Goals: Prepayment might be better if your goal is to reduce debt quickly.
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Conclusion
Prepaying home loans substantially reduces interest costs over long tenures. LIC HFL offers exceptional prepayment options for borrowers to determine potential savings on their housing loans. After considering key aspects, homeowners can decide on suitable prepayment amounts and strategies to optimize savings.
Looking for expert guidance on your home loan journey? Choose Credit Dharma for all your home loan needs, from application to repayment. We’re here to assist you in making informed decisions, optimizing prepayment amounts, and strategizing for maximum savings. Utilise our tools and expertise to expedite your path to financial freedom.
Frequently Asked Questions
LIC Housing Finance generally allows any amount of prepayment without charges on floating rate home loans. For fixed rate loans, conditions may apply, so it’s best to refer to your loan agreement or contact LIC directly.
The reduction in EMI after a prepayment depends on whether you choose to lower the EMI or shorten the loan tenure. If you opt to decrease the EMI, the amount of reduction will depend on the remaining tenure and the prepayment amount.
Most lenders allow significant prepayments for floating rate home loans without any charges. However, fixed rate loans might have restrictions or penalties. The exact terms can vary, so checking your specific loan agreement is advisable.
To close a home loan early with LIC, you can make a full prepayment of the outstanding balance. It’s recommended to notify LIC in advance, prepare the necessary funds, and follow up with them to complete any required formalities to ensure the loan is closed properly.
Deciding between prepayment or continuing with a home loan depends on your financial situation. Prepayment can save on interest costs but may deplete your cash reserves. Consider your financial goals and consult with a financial advisor to make an informed decision.