|Home Loan Amount|
|Interest Rate p.a. [In %]|
|Loan Tenure [In Months]|
|Pre-payment Start Month |
[e.g. If pre-payment will start from 8th month then enter 8]
This is not just any home loan prepayment calculator for me. It gave me the inspiration, and guided me to become debt free.
Now, after years of painstaking focus and persistence, I am finally debt free.
There is no home loan. In fact, there are NO loans any more. It is a different life.
I dreamt of this phase, and it has finally come true. What made it happen?
It will not be an overstatement to say that, my home loan prepayment calculator made it possible.
In year 2012-13, it all started as a result of this prepayment calculator. How?
While I was developing this prepayment calculator in excel, I pledged to become “debt free” one day.
Today, we are breathing this reality.
The world has changed, as I am no more living in fear of “what will happen if I default on my home loan“.
Every penny that I earn today, is spent the way I want. No automatic EMI deductions any more.
Utility of prepayment calculator
When I was first building this calculator on my excel sheet, I sort of had this premonition that, I am working on something important.
Today I can say that, my excel sheet was the most utilitarian excel sheet I have used till now.
What was its utility? It changed the way I looked at my “home loan”.
I always considered home loan as a “good loan”. This is not wrong.
But due to the home loan prepayment calculator, “good loan got converted into a great loan”. How?
It helped me save lakhs of Rupees. We will see in this article how this was achieved.
But before that, a word of thanks to my brother.
He was the one who helped me to convert my “excel based prepayment calculator” into an online tool.
That was the time I first decided to write a blog post on home loan prepayment.
Since then, several readers have benefitted from the concept of “prepayment of home loan“.
But am I not making “home loans” sound too good? Do not get me wrong.
Loans of any type are bad. But we can learn to convert a home loan into a great “asset building tool”. How?
Take home loan, buy a property. Make prepayment, and clear the loan within 4-5 years.
This thought process is necessary, as loan on its own are almost evil. How?
What are the problems with loans? There are two problem with loans:
- It makes us buy things we can’t afford.
- It charge interest.
We are already making a mistake by taking a loan (buying things we can’t afford otherwise).
On top of that, we are facing the threat of “interest burden”.
What is interest burden?
#1. The Interest Burden
Let me give you a snap-shot of my online prepayment calculator. It highlights the interest burden.
What it shown here is interesting.
A person took a loan of Rs.30 lakhs.
On this loan amount, what is charged as interest is a whopping Rs.32.48 lakhs.
This is more than the loan amount itself.
As a result, what the person has to payback to the bank? Rs.62.48 lakhs.
This is what one has to minimise (interest burden).
The lower will be the interest burden, lesser will be the overall payment made to the bank.
Consider the above case, where a person took home loan of Rs.30 lakhs @8.5% p.a., for 20 years.
This person made a prepayment of Rs.150,000 in the first 12th month.
Lets see how his “interest burden” and the “total payable” is effected:
As the person made the prepayment of Rs.150,000 in 12th month, he could save Rs.534,832 on interest (Rs.32.48L-Rs.27.13L)
The bigger are the loan amounts, and interest rate, bigger will be the savings,
One can use loan prepayment calculators to visualise the potential savings.
Isn’t this a great visualisation?
After use of the prepayment calculator, the user will exactly know the following about the prepayment:
- How much to pay?
- When to pay?
- How much it will save?
With this kind of clarity, I am sure, majority will opt for loan prepayment, right?
This is what loan prepayment calculator does. It gives you a clarity.
Hence it motivates its users to keep making prepayments till loan balance is zero.
But online calculators has their own limitations.
For more flexibility, one can also use my excel based home loan prepayment calculator.
There is one point that I would like to highlight here. Though it may sound naive, but I would still say it.
Loan prepayment calculators has great utility, but for whom? For people who are aware of the “benefits of loan prepayment”.
How many people realise the magnitude of the positive effects of “loan prepayment” on their financial health?
A very tiny minority. Why?
#2. Why less people know the real benefits of loan prepayment?
When we first developed this prepayment calculator in year 2013, only a handful of websites used to have loan prepayment functionality. Why?
Because prepayment is profitable for you and me. It is not profitable for the banks (who issue loans to us).
Interest paid by the borrower is the profit for the banks.
Banks would like us to continue paying interest till eternity.
It is in our benefit that we shall find ways to reduce our interest burden.
And we can do it only if we get aware of it.
But who will make us aware of the benefits of loan prepayment? At least the banks will not do it.
This is one reason why, till few years back, loan prepayment was not known to majority.
My father took home loan, and judiciously paid all EMIs till 15 years.
Had he been aware of the benefits of loan prepayment, I am sure he would have made the home loan zero within 8-10 years itself.
In those times, loan prepayment was not a very discussed topic. Even today, less people know about its true powers & utility.
People who want to learn more about loan prepayment would get insights only from blogs like this one…
The write-up on loan prepayment that is available in this blog, will be hard to locate elsewhere.
This blog explains in detail the concept & benefits of home loan prepayment.
But to top it all, it attempts to exemplify the disadvantages of the “interest paid on loans“.
#3. What’s the problem with “loan interest”?
What is the worst thing about interest?
Even it we continue paying interest for next 100 years, the loan burden will not reduce even by one Rupee.
Let me explain:
Suppose one took the following loan:
- Loan: Rs.30 Lakhs.
- Interest: 8.5%.
- Time: 20 years.
In this case the EMI will be Rs.26,035 per month.
There are two components of every EMI payment:
- Principal component.
- Interest Component.
Lets see what will be the break-up of EMI in the initial months:
In month-1, out of Rs.26,035, principal paid is Rs.4,785 & interest paid is Rs.21,250.
In month-2, out of Rs.26,035, principal paid is Rs.4,819 & interest paid is Rs.21,216.
In month-3, out of Rs.26,035, principal paid is Rs.4,853 & interest paid is Rs.21,182.
Note: with passage of time, principal component is increasing, and interest component is decreasing.
It is important to realise what is happening here:
What is happening?
In first month, the EMI of Rs.26,035 reduced the loan balance by Rs.4,785 only.
Hence loan outstanding reduced from Rs.30,00,000 to Rs.29,95,215
In second month, the EMI of Rs.26,035 reduced the loan balance by Rs.4,819.
Hence loan outstanding reduced from Rs.29,95,215 to Rs.29,90,397.
We will continue to pay EMI for a loan till the loan outstanding becomes zero.
Suppose, one decided to pay only the interest portion of the EMI, and not the principal portion.
What is the interest portion? Rs.21,250.
In this case, the person will pay less EMI (Rs.21,250 instead of Rs.26,035).
But as no principal portion is paid, even if the person continues to pay Rs.21,250 for 100 years, the loan balance will remain as Rs.30 lakhs.
So what is the point?
The point is, for us, it is important to keep reducing the principal as fast as possible.
The sooner the principal component becomes zero, the better it is for us.
Because without principal reduction, we will continue to pay EMI’s till eternity.
Interest payment adds no value for us. Our focus must be on reduction of principal.
How to reduce principal faster? Make prepayments.
But to motivate oneself to make regular prepayments, lets get more insights about “loan prepayment”.
#4. Insights into loan prepayment
We when pay EMI, a portion is principal and balance is interest.
In initial months, interest component is larger than principal component. Why?
Because in initial months, loan outstanding is maximum.
As the loan outstanding will reduce, interest burden will also reduce.
EMI payment is one method to reduce loan outstanding.
But the best method of reducing loan outstanding faster, is by prepayment of loan.
Let’s understand this is an example.
Suppose one took the following loan:
- Loan: Rs.30 Lakhs.
- Interest: 8.5%.
- Time: 20 years.
This person made a prepayment of Rs.200,000 in 5th month. Lets see how his loan outstanding is effected:
In months, where prepayment was not made, the loan outstanding was reducing very slowly.
- In month 1: reduced by 4,785
- In month 2: reduced by 4,819
- In month 3: reduced by 4,853
- In month 4: reduced by 4,887
- In month 5: reduced by 2,04,922
In month 5th, loan outstanding was reduced by a huge amount (due to prepayment).
This is the benefit of prepayment. It drastically lowers the loan outstanding.
A person whose target is to become debt free fast, loan prepayment is a tool made in heaven.
The benefits of prepayments are three folds:
- It lowers loan outstanding.
- Hence, it saves interest payment.
- It also empowers our EMI.
What I mean by “empowering EMI”?
#4.1 Prepayment empowering EMI’s
Consider this, suppose your EMI is Rs.26,035.
Will it not be great, had the complete Rs.26,035 portion of EMI gets used in lowering the loan outstanding?
It will be great, but it doesn’t happen like this.
Instead, in initial months, only Rs.4,785 out of Rs.26,035 is used to lower the loan outstanding.
How to empower the EMI? How to increase its principal component?
Our EMI is empowered every time we make a prepayment. How?
In the above infographic, you can see that, after Rs.200,000 prepayment was made in 5th month, the principal portion of EMI, suddenly jumped from Rs.4,922 levels to Rs.6,373 level.
Such regular prepayments, month after month, can empower our EMI’s to a great extent.
The bigger will be the prepayment amount, stronger will become our EMI.
Why this happens? Because of the following sequence of events:
- Prepayment reduces loan outstanding.
- Lower loan outstanding, reduces interest.
- When interest is less, principal component will become heavy.
Always remember this:
EMI = Interest + Principal
Reduce interest to enhance principal component of EMI.
But there is a catch here. To get maximum benefit of prepayment, it must be timed correctly.
#5. Right time to prepay home loans…
Purpose of home loan prepayment is to save the interest component.
Interest load is maximum in initial months.
Hence loan prepayments made in initial months saves the most amount of money.
The earlier we start home-loan-prepayment the better.
Interest burden is maximum in initial months. Interest then gradually falls in later months.
Lets visualize how interest & principal component of loan varies with time.
In initial years, interest component is maximum. Maximum interest is due to high loan outstanding.
This is why in initial years, majority of our EMI is consumed to pay interest.
Hence, this is the time (initial years) when prepayment shall be made.
Prepayment will increase the principal component of EMI and reduce the interest component.
But what if you don’t have any money for making prepayments?
We always have spare money. But we happen to use it elsewhere.
How I funded my prepayments?
I stopped all investments. Every dime saved each month was used to make prepayments.
Lets see how we can use our spare cash for prepayments…
#6. Spare cash & prepayments…
Do you use your spare money for investment.
If you have a loan, use spare money to make prepayment. Why?
Prepayment shall always take top priority till you are not debt free.
There may be other opportunities around which can give higher returns.
But still, it is better for a common man to give priority to debt reduction as compared to investment.
How to decide if extra money in hand shall be used for prepaying loans or to be used elsewhere?
Here is a way out….
Rule says, pay your costlier debts first before making any investment.
But what if you know that your investment is going to give you very high returns?
If you are very sure, you can go for the investment.
But the problem is, majority does not know how to analyse investments.
Hence, my personal preference (for people like me and you) is always “home loan prepayment”.
Interest that we save on home loan is like an assured return.
Once we make a prepayment, interest saving is assured.
But if the same money in used to buy stocks, mutual funds etc, are their returns assured? No.
Expert investors may give YES as an answer.
But for common men, loan prepayment is a much better alternative.
For a common man, interest saving in tune of 8.5%-10% is still a phenomenal return.
But how investors should treat home loan prepayment? Returns on 8.5%-10% may not be a great return for investors, right?
How property investors should conceptualise the benefits of “loan prepayment”?
#7. Property bought on home loan, yields below par returns…
As a rule of thumb, a real estate property which yields rental income of 4% per annum, in first few months, is considered a good investment.
- Property Value (our cost) = Rs 30 Lakhs
- Rental Income in first year = Rs 10,000/month (Rs 120,000/year)
- Rental Yield = 120,000/30,00,000 = 4%
But the yield of 4% will happen when we we buy property without taking loan.
In this case our our cost is only Rs 30 lakhs.
In case of home loan scenario, Rs 30 lakhs is not the only cost.
Out total cost is Interest+Principal.
- Principal: Rs.30L
- Interest: Rs.32.48L (@8.5% p.a.).
Cost will be equal to Rs 30 + 32.48 = 62.48 Lakhs.
In this case the rental yield will be much lower:
- Property Cost= Rs 62.48 Lakhs
- Rental Income in first year = Rs 10,000/month (Rs 120,000/year)
- Rental Yield = 120,000/62,48,000 = 1.92%
Due to interest burden, the rental yield gets reduced substantially.
The interest burden has made our property investment less lucrative.
In order to make our property investment more lucrative, we must decide to prepay our home loan as fast as possible.
What I mean by “as fast as possible”?
A common man can barely save couple of hundred rupees every month from salary.
How he/she can prepay home loan fast enough?
Yes, it is a challenge. But there is a very easy way out. How?
#8. Make Prepayments by increasing the monthly EMI
Yes, this is also possible.
It is not necessary to make prepayments in lumpsum amounts only.
One can also make smaller prepayments each month and save huge amount of money. How?
Lets take an example:
- Home loan: Rs 30,00,000
- Interest: 10.5% p.a.
- Time: 20 years (240 months).
In this case the regular EMI will be Rs.29,951.
Suppose you decide to increase your EMI by Rs.500.
It means, instead of paying Rs.29,951, you will now pay Rs.30,451.
[Note_1: Full Rs.500 (increased amount), will be sued to decrease the principal component of loan]
[Note_2: Banks generally will not allow EMI reduction after it has been increased as per your advice]
Do you know, how much you can save by paying just Rs.500 extra each month?
Your savings will be Rs.2,64,968. Moreover, you loan will get over in 19 years only.
Similarly, you can refer the below table to understand, how extra EMI’s can save us huge amounts of money:
|SL||EMI (Rs)||Extra Payment as prepayment/ month (Rs)||Total Interest Paid in Loan Tenure (Rs)||Savings (Rs)||Years for Loan to be 100% paid|
- Rs.1,000 extra EMI: can save Rs.4,92,929.
- Rs.1,500 extra EMI: can save Rs.6,91,781.
- Rs.2,000 extra EMI: can save Rs.8,67,272.
- Rs.2,500 extra EMI: can save Rs.10,23,681.
I hope by now you must have realised the real power of loan prepayment. It can make anyone debt free for life.
So now, let’s see how we can plan our loan prepayment regime…
#9. How to plan for prepayment of home loan?
Not many of us has lump-sum cash to make a substantial prepayment of home loan.
This difficulty becomes amplified when banks does not accept small amounts as prepayment.
Example: HDFC. They accept prepayments in multiples of EMI.
If ones EMI is Rs30K, he/she can make prepayment of Rs 30K or its multiples.
But making prepayment of even one EMI is not easy for common man.
What is the solution?
Start a parallel saving plan like Recurring deposit (RD).
Start a recurring deposit of say Rs.1,000 each month.
Let this recurring deposit continue, till the accumulated amount is equivalent to one EMI.
Once sufficiently big savings is build-up, break the RD and use its funds to make prepayment.
But I have a better suggestion here. Suppose you are sure that each month you can save Rs.1,000 for funding loan prepayment.
Plan your prepayment schedule like this:
This is one the easiest way to plan home loan prepayments for loan issuers like HDFC.