A home loan has a payback period that often continues for many years. People of all ages naturally feel stressed when they have a large financial burden, such as a housing loan. If responsibly arranged, a house loan is unlikely to exceed the applicant’s annual budgetary constraints, which include unexpected monetary tragedies.
Whenever you choose to prepay or part-pay your house loan, you can relieve some of the burden associated with paying back your loans.
In the scenario of housing loans, the person who borrows might lessen the influence of his or her interest rate by prepaying the loan in full or partially. These features reduce the financial obligation’s strain on your budget.
Whether you choose to prepay the money you borrowed or not, understanding what part payment in a house loan means is of the utmost importance for everybody who takes out a housing loan.
Full Pre -Payment in Advance
Complete pre-payments, as the term implies, involve making payments off the full home loan amount ahead of schedule within the first few years of the term. Consumers who choose this method of repayment repay the whole balance that remains before the due date, lowering the loan’s value because the sum charged in interest is lower. The loan duration comes to an end with the payment, which means the person taking out the loan is no longer in debt. However, the applicant will be charged a prepayment penalty.
Partial – Payments
This approach involves paying partial quantities of money ahead of time as a kind of loan prepayment. Someone who borrows might get an infusion of money in the form of corporate profits or wage bonuses, among other things. In these situations, the customer can use the chance to make payments off the housing loan in installments. Part payments also have house loan prepayment advantages because they reduce the principal value of the loan while also lowering the monthly installments and overall interest costs.
For example, If you decide to make a partial payment on a house loan, you are returning a certain part of the total amount of the borrowed amount before the loan’s planned repayment period ends. Assume you’ve gotten a Rs. 35 lakh housing loan amount that must be returned over a 25-year term. But you choose to cover an initial lump sum of Rs. 5 lakhs, then continue with recurring installments as specified. It goes on until the money you borrowed is completely paid off. Partial payments on a house loan might help lower the balance still outstanding and speed up the loan’s repayment period.
Functions of Partial Payments on Housing Loans
- Lowering the Interest Costs: Among the key purposes of partial payments is to lower the interest charge over the loan’s term. You may lower your remaining balance by making additional payments against the principal sum. This, however, in the meantime, lowers the interest rate on the balance that is still outstanding, making it possible to save huge sums of cash in future years.
- Reduces Loan Term: Another benefit of partial payments is that they might help you reduce the term of your house loan. Making frequent partial payments allows you to lower the principal sum much faster, resulting in an earlier repayment. This not only reduces interest but also provides financial independence and mental satisfaction.
- Improves Credibility: Choosing to make partial payments indicates fiscal responsibility and accountability. It demonstrates your capacity to manage your cash efficiently. This beneficial financial activity can improve your credibility, which will make it simpler to secure additional funding on supportive conditions and terms of repayment.
Advantages of Partial Payments on a Housing Loan
- Growing Equity: Part payments help boost your home’s equity. As you pay down the principal sum, your property’s equity increases. This rising equity may be useful in the coming years if you opt to look for further loans for other objectives.
- Security Concern: Making part payments allows you to feel accomplished and at ease. Recognising that you are making progress towards decreasing your obligations and moving closer to home ownership can reduce financial anxiety and increase happiness and wellness.
- Better Debt-to-Income Ratios: Paying off a portion of your loan might reduce the remaining balance while enhancing your debt-to-income ratio. This ratio is a crucial criterion that financial institutions use when determining credibility to secure future lending and financial deals.
- Loan Refinance Alternative: Making partial payments may allow you to refinance your loan. You may be able to refinance your housing loan at a lower rate of interest if the principal balance decreases. This may result in additional interest savings and better loan conditions.
Are Partial Payments and Prepayments the Same in Housing Loans?
No, partial payments and prepayments are not the same as one another. Although both require making repayments on a house loan, they have different purposes and effects on the amount borrowed.
Partial repayment means paying a partial payment against the remaining principal amount of a house loan. It entails returning a certain amount of the borrowed money before the end of its term.
The goal of the partial payment is to bring down the remaining balance, which may lead to savings on interest and ultimately cut down the loan term. A partial payment permits you to pay off extra installments while remaining on your normal repayment process until the loan amount is completely paid off.
Prepayment: Prepayment is the total payback of the remaining loan balance ahead of the agreed-upon term. It entails repaying the full loan amount in a single transaction.
Prepaying the loan eliminates the outstanding principal balance, and the debt is regarded as fully returned. Prepayment is capable of saving you a lot of money on interest and allowing you to close your loan ahead of its tenure.
How Partial Payment on Your Home Loan Can Save a Bundle for You?
A personal loan or automobile loan is easier to pay in advance than a housing loan because the loan size is generally significantly lower. But with housing loans, the matter may be more challenging. Yet, if you receive an ample amount of funds, you may consider making partial payments on the borrowed funds. According to this situation, you repay certain amounts of your outstanding principal amount alongside the regular EMI. Decreasing the principal amount reduces the overall amount of interest that would normally be payable to you. Most financial institutions will impose an extra cost or part-payment charge on automobile loans or personal loans, just like they do on loans. Certain financial institutions eliminate this fee when offering housing loans.
The table of data shown below will explain to you how making a partial payment may enable you to save money in general. Suppose that you are responsible for an active loan of INR 500,000 and INR 100,000 for a partial payback. It also implies that any savings from EMIs are invested at a 7% annual rate.
| Narrative Head | Repayment as per Normal Schedule | Repayment with partial-payment |
| Outstanding Principal | 5,00,000 | 5,00,000 |
| Partial Repayment | 1,00,000 | |
| Interest Rate per Annum | 20% | 20% |
| Tenure | 5 years | 5 years |
| EMI | 13,247 | 10,598 |
| EMI diff | 2,649 | |
| Total amount repaid after 5 years | 7,94,820 | 6,35,880 |
| Total Interest Paid | 2,94,820 | 1,35,880 |
| Interest saved for making partial Payment | 1,58,940 | |
| Considering a penalty assessed on partial-repayment at 4% of the principal due, penalty/pre-closure charges | 20,000 | |
| Savings after paying off penalty charges | 1,38,940 | |
| Extra interest generated by investing saved EMI of INR 2,649/- computed @7%p.a. | 27,579 | |
| The entire amount gained | 1,66,519 | |
| If INR 100,000/- was saved in a banking FD at 7% for a term of five years, that amount after 5 years is going to be | 1,66,519 | |
| Net Profit | 26,264 |
According to these assessments, paying back INR 100,000 of the loan’s principal in part will result in a profit of INR 26,264 after 5 years. These statistics will alter depending on the loan’s rate of interest, interest on investments rate, loan penalties, and other reasons.
It is thus necessary for you to comprehend the financial advantages available to yourself if you want to pre-close a financial agreement or make a partial payback after deducting penalties and other expenses. When calculating the principal amount for a house loan, keep in mind the tax refund advantage of up to INR 150,000.
Bottom Line
Partial payment on a housing loan means repaying a certain amount of the borrowed amount earlier than the loan’s term ends. For example, say you took out a housing loan for Rs 15 lakh and are required to reimburse it over 20 years (the duration). You repay an initial lump sum of Rs 2 lakh and then make recurring payments according to the lender’s terms till the final day of your tenure. But you might find yourself in a scenario that allows you to generate some unexpected profits and desire to lower your debt sooner by repaying a larger portion of the principal figure. You have the option of making a partial repayment or partial payback on the housing loan. The result of this will reduce your overall interest responsibilities. You can cut your EMIs or minimize the payback period.
Part-payment on a housing loan is an effective way to save money (interest costs) and shorten the repayment period. But foreclosing the loan might not prove to be a wise decision because you risk losing any governmental tax rebates you receive year after year on your housing loan repayments. As a result, you must review all of the conditions of the agreement before making any decisions.