Today after years of painstaking focus and persistence of my family, we are finally debt free.

There is no home loan. In fact, there are *NO* loans any more. It is a different life.

I have still not earned the tag of being a middle-aged-man, and see, I am debt free!

I dreamt of this phase of life and it has finally come true.

What made it happen?

It will like an overstatement to say that my home loan prepayment calculator made it possible.

But this is also true that 5 years back, it all started with it.

## Loan prepayment Calculator…

When I was first building this calculator on my excel sheet, I knew that this is going to be the most utilitarian excel sheet I have used till now.

Today this one excel sheet changed my life.

Later on my brother went ahead and converted the excel to an online prepayment calculator.

*Check this link to access the free online loan prepayment calculator*

Ever since then, this one blog post has helped many readers to understand the concept and necessity of **loan prepayment**.

So the idea is to strive to become debt free in life as early as possible. And, a tool like my home loan prepayment calculator will help you do just that.

## #1. The Interest Burden

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.

We are providing here an EMI calculator with home loan prepayment functionality enabled.

We try to provide you the **best** loan calculator. What makes a loan calculators best for its users?

A loan calculators utility is substantially enhanced by incorporating the functionality of prepayment (also called part payment).

But this is not all, you get something more valuable in this blog post.

This blog not only offers a good home loan prepayment calculator, but it also provides a researched, **in depth write up**.

*This blog explains in detail the concept & benefits of home loan prepayment.*

One can save large sums of money if prepayment is done timely. Hence this blog has been prepared with objective of making its readers more knowledgeable about the concept of loan prepayment.

Though the title talks about home loan prepayment, but the concept of prepayment can be used with any loan.

We strongly believe that home loan prepayment is the most effective tool available for common men which can eventually make them financially very stable.

When we developed this prepayment calculator in year 2013, only a handful websites used to offer prepayment calculator online. But now, almost all banks offer loan calculators with a prepayment option.

## Why use a prepayment calculator?

Prepayment calculators helps in **estimation of potential savings**. Exemplifications coupled with a great software makes this home loan calculator a rare find on internet.

Lets try to understand the utility of loan prepayments.

Lets take an example. Suppose one took home loan with tenure of 20 years. In this tenure total interest payable will be **1.4 times** of principal (@10.5% p.a.). Means, if home loan is $100,000, total interest payable will be $140,000. Total payment to be made by the borrower will be $100,000+$140,000 = $240,000.

So whats the problem, if we take loan we must pay the interest. Whats the big deal?

The big deal is in the **interest burden**.

One took loan of $100,000. Repayment of these $100,000 is not a problem. The problem is with the interest payment. In our example the interest payment was 1.4 times that of the loan amount.

All of $140,000 that one pay as interest is **EXTRA COST**. We must do everything to reduce this extra cost burden.

So, it is important to understand this concept that we cannot take home loan and keep paying its EMI’s for year together just like that. It is in our interest to THINK and form a strategy of how we can reduce our interest burden.

If we can use use a good home loan prepayment calculator, we can plan to save huge amount of money in interest component of the loan.

Home loan prepayment calculator provided here can help us to both visualize the problem & save lots of money in interest.

### Utility of home loan prepayment calculator

What this calculator does best is make people aware about the potential savings they can ensure with every dollar of prepayment.

But why I am so crazy about loan prepayments (some banks also call it part-payment of loan)?

The worse part of interest payments is that, even it we continue paying interest for next 100 years, the loan burden will not reduce even by one dollar.

#### It is important to realize that we must pay-off principal portion of loan as soon as possible.

There are two components of any loan. One part is principal & second part is interest. Till we pay-off principal, interest expense will continue to incur month after month.

We can continue to pay interest all our life, but loan will never finish. Without clearing principal component of loan, the loan never gets paid.

When we pay EMI, major portion of EMI is used to pay **interest**. Another portion is used to pay **principal**. As banks priority is to earn interest, they will never like you to prepay you loans.

But we must plan a way to pay more principal. How it is possible?

The solution lies in the prepayment of loans.

## Lets see an example…

Suppose one takes loan of Rs 100,000 for 5 years @ 15% per annum interest. His monthly EMI will be close to Rs 2,382. Total interest to be paid in 5 years is Rs 42,920. Total amount returnable to bank is Rs 100,000 + 42,920 in 5 years.

If he prepays the loan after 6th month itself, he paid just Rs 4,436 in interest (in place Rs 42,920). This is a huge saving.

Its true that clearing a 5 year loan in just 6 months is very difficult. But what is important to visualize here that what is the SAVING POTENTIAL.

If in a loan of one lakh Rupees, we can save approx. Rs.40,000, Imagine what will be the saving if loan amount is Rs.50 lakhs?

### Is there a 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, principal component is maximum. Principal maximum means chargeable interest will be maximum. This is why in initial years, majority of our EMI is consumed to pay interest.

### Example of loan payment in initial years…

**Suppose one took a home loan of Rs 30 Lakhs @ 10.5% for 20 years.**

- In the first year sum of all EMI’s would be approx. Rs 2,10,000
- Out of this Rs 2,10,000 only Rs 26,600 will used to pay loan principal.
- Balance Rs 1,83,400 is used only to pay interest.

So how does LOW principal payment impact us?

Low principal payment means higher loan outstanding balance. High loan balance means higher interest to be paid in next EMI’s.

#### Already thinking how to reduce loan outstanding….?

If we pay only EMI, we have no possibility to save interest. By loan prepayment we can pay-off principal component faster. By making prepayment we pay additional sums of money above EMI.

Prepayment allows us to pay principal faster. Each payment made, in addition to scheduled EMI, goes as prepayment.

**How effective are online home loan prepayment calculators?**

These calculators helps us to visualize how much can we saved because of prepayment. This motivates people to practice loan prepayment.

On internet there are great loan prepayment calculators launched every day. It means people are becoming more aware about the concept of loan prepayment.

### How EMI’s on Home Loan is calculated?

The formula for EMI calculation is:

**E** = EMI

**P** = Principal

**r** = monthly rate of interest (Interest is 10.5% it means r = 10.5/12/100 =0.00875)

**n** = time in months

Example: home loan of Rs 30,00,000 at rate of 10.5% per annum for a period of 20 years (240 months). EMI will be:

E = 30,00,000 x 0.00875 x [(1+0.00875)^240 / {(1+0.00875)^240}-1} = Rs 29,951 per month for next 20 years.

#### Prepayment of home loan is always a better choice?

No not always.

There are cases when prepayment cannot take top priority.

If there are other opportunities that gives higher returns, then loan prepayment will take a second priority.

Confused? Let me explain…

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? In this case the call will be based on numbers…how?

Suppose you you are investing in an index funds, then probably your **long term return** will be close to 12% per annum (leave aside risk factors).

Compare this return with your home loan **interest rate**. If home loan interest rate is higher than 12%, then prepay your home loan first.

When home loan interest falls below 12%, even them home loan shall be paid?

In most cases, YES. Why?

The problem is, majority does not know how to handle investment (leave aside equity – index funds)?

My personal preference (for people like me and you) is home loan prepayment. Interest that we save on home loan is ASSURED. Once we make a prepayment, interest saving is assured.

But if the same money in used to buy index funds, are its returns assured? No. Expert investors may give YES as an answer here. But for common men, loan prepayment is a much better alternative.

Interest saving in tune of 10% per annum is phenomenal. At times, even stock market cannot assure such high returns in short term.

## Loan prepayment is common mans way to get rich

Home loan is the biggest-loan an average middle class avails in his life. As home loan amount is big, people often go for longer loan tenure like 20-25 years. In home loan, both loan amount & tenure is big. These two factors makes the interest burden huge.

For example, a home loan of Rs 30 lakhs, for **20 years** at rate of 10.5% per annum, interest burden is **Rs 42 lakhs**. But when home loan of Rs 30 lakhs, is availed only for **15 years** at rate of 10.5% per annum, interest burden is only **Rs 27 lakhs**. When home loan of Rs 30 lakhs, is availed only for **10 years** at rate of 10.5% per annum, interest burden is only **Rs 19 lakhs**.

These type of permutations can be easily done using home loan prepayment calculators.

### A Calculation we shall never forget….

As a rule of thumb, a real estate property which yields rental income of 4% per annum 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 only our cost. Out total cost is **Interest+Principal**. Cost will be equal to Rs 30+41.5=71.5 Lakhs. In this case our rental yield will be much lower:

**Property Cost (due to loan)** = Rs 71 Lakhs

**Rental Income in first year** = Rs 10,000/month (Rs 120,000/year)

**Rental Yield** = 120,000/71,00,000 = 1.7%

*We can see that 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.*

#### Lets see how much interest we can save by making small prepayments

Lets take an example, home loan of say Rs 30,00,000 at rate of 10.5% per annum for a period of 20 years (240 months).

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 |

1 | 29,951 | 0 | 41,88,335 | 0 | 20 |

2 | 29,951 | 500 | 39,23,348 | 2,64,968 | 19 |

3 | 29,951 | 1000 | 36,95,405 | 4,92,929 | 18.1 |

4 | 29,951 | 1500 | 34,96,554 | 6,91,781 | 17.3 |

5 | 29,951 | 2000 | 33,21,043 | 8,67,292 | 16.5 |

6 | 29,951 | 2500 | 31,64,653 | 10,23,681 | 15.8 |

7 | 29,951 | 3000 | 30,24,198 | 11,64,137 | 15.3 |

8 | 29,951 | 4000 | 27,81,503 | 14,06,833 | 14.3 |

9 | 29,951 | 5000 | 25,78,476 | 16,09,860 | 13.4 |

10 | 29,951 | 10,000 | 19,07,612 | 22,80,724 | 10.3 |

From this table you can see that, just by making extra payment of Rs 500/month we can save Rs 2.65 lakhs. By making extra payment of Rs 3,000 we can save as high as Rs 11 lakhs in totality. By making those extra payment we are paying nothing extra. We are just prepaying the home loan.

### How to plan for prepayment of home loan?

Not many of us has that surplus cash to make a substantial prepayment of home loan. But the difficult part is banks does not accept small amounts of money as prepayment. They want prepayment to be made in multiples of EMI. So if ones EMI is Rs30K, he/she can make prepayment of Rs 30K or its multiples. But making prepayment of Rs30K each month is very difficult. What is the solution?

A better strategy will be to start a parallel saving plan like Recurring deposit. Start a recurring deposit of Rs 3,000 and contribute it till next 10 months. In ten months one will have Rs 30,000 as savings. In the 11th month make the prepayment of Rs 30K. Even such small prepayments of Rs 3,000 per month will make huge long term saving of interest. Prepayment of home loan will also reduce the loan tenure. It means one can plan his/her next real estate investment. [See Tip 6 below]

Before starting of EMI payment towards home loan, always keep a note of two things:

**(1)** how much total interest you are paying against your loan &

**(2)** Break-up of principal and interest in each year of your loan payment. As shown in the above chart, interest payment in first few years are maximum and in later years principal portion gradually increases.

So if you are interested to get the dual benefits of prepayment (interest saving and term reduction), then extra payment shall shall start from first few months itself. If you are not making payment in initial years you are actually paying back majority of interest to bank without saving it. If you are making extra payment in later years you will only reduce the loan tenure. Interest saving will be negligible.

## Recap of what we learnt about Loan Prepayment

**(1)** If you would like to make prepayment of your home loan, then start making prepayment from first years itself. You will save heavily on interest the earlier you start.

**(2)** If you have costlier loans like credit card debt, personal loan etc, pay them first. Idea is to pay costlier debt first before making prepayments

**(3)** Make sure to declare the interest and principal component of your loan when you fill your income tax return. This can save you a lot on income tax.

**(4)** As per present directive of RBI, prepayment charges on home loan cannot be charged by any bank. So do not be fooled by banks if they give you discourage you to make prepayment of home loan.

**(5)** Your prepayment decision should not be delayed. One day a close friend of mine came and told me that he took a home loan of Rs 30 lakhs 4 years back and after paying 48 installments his outstanding principal is still Rs 27 lakhs. He was furious and he wanted to prepay the loan in order to reduce the principal. I immediately advised him to go ahead. If possible, one must start prepayment from the second month itself. We shall not wait for too long to start making prepayment.

**(6)** Plan to save money each month. Generally banks accept prepayment amount equivalent or multiple of your existing EMI. Put aside a fixed amount each month towards prepayment. When this accumulated savings is equivalent to one EMI, use them to make prepayment.

**(7)** Every year we get a pay hike. Decide to use 60% of your pay hike in making prepayment.

Take it from me the you will thank yourself thousand times after you have prepaid your home loan in full. Start now.

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