When it comes to home loan prepayment and EMI increasing, it’s important to approach these strategies carefully and consider their implications. Let’s discuss these concepts with an example using Indian Rupees (INR):
Example: Suppose you have a home loan of INR 50 lakhs (5,000,000) for a period of 20 years at an interest rate of 8% per annum. Here are some strategies and considerations for prepayment and EMI increase:
- Prepayment:
a. Lump Sum Prepayment: If you have surplus funds, consider making a lump sum prepayment towards your home loan. This reduces the principal amount, resulting in a lower outstanding balance and potential interest savings over the loan tenure. However, before making a prepayment, check if your lender allows it and if any charges or conditions apply.
b. Partial Prepayment vs. Full Prepayment: You can choose between partial prepayment (paying a portion of the outstanding principal) or full prepayment (repaying the entire outstanding loan amount). Partial prepayment allows you to retain some liquidity while reducing the interest burden. Full prepayment helps you become debt-free sooner, but it may impact your overall financial liquidity.
Prepayment based loan closing Example
To calculate the impact of prepayment on the closing of a home loan, you need to consider factors such as the loan amount, interest rate, tenure, and the amount of prepayment. Let’s consider an example using Indian Rupees (INR):
Example: You have a home loan of INR 50 lakhs (5,000,000) for a tenure of 20 years at an interest rate of 8% per annum. Let’s assume you decide to make a prepayment of INR 2 lakhs after paying EMIs for 10 years.
Step 1: Calculate the remaining number of EMIs. To determine the remaining number of EMIs, you need to consider the tenure and the number of EMIs already paid.
In this example, you have paid EMIs for 10 years, which is 10 * 12 = 120 EMIs.
Remaining EMIs = Total number of EMIs – EMIs already paid Remaining EMIs = 20 years * 12 – 120 Remaining EMIs = 240 – 120 Remaining EMIs = 120 EMIs
Step 2: Calculate the outstanding loan balance. To calculate the outstanding loan balance after the prepayment, you can subtract the prepayment amount from the remaining loan amount.
Outstanding Loan Balance = Principal loan amount – Prepayment amount Outstanding Loan Balance = 5,000,000 – 200,000 Outstanding Loan Balance = INR 4,800,000
Step 3: Calculate the reduced EMI required for the remaining tenure. To determine the reduced EMI required to close the loan within the remaining tenure, divide the outstanding loan balance by the remaining number of EMIs.
Reduced EMI = Outstanding Loan Balance / Remaining EMIs Reduced EMI = 4,800,000 / 120 Reduced EMI = INR 40,000
Therefore, to close the loan within the remaining 120 EMIs, the reduced EMI would be INR 40,000.
By making the prepayment of INR 2 lakhs, the outstanding loan balance is reduced, and you can continue paying the reduced EMI for the remaining tenure to close the loan.
It’s important to note that prepayment may involve additional charges or penalties as per the terms of your loan agreement. It’s advisable to consult with your lender to understand any applicable charges and assess the impact on the overall loan repayment before making a prepayment.
- EMI Increase:
a. Opting for Step-up EMIs: Some lenders offer step-up EMIs, where the EMI amount gradually increases over time. This is beneficial if you expect your income to rise in the future. Starting with lower EMIs initially can ease your financial burden in the early years, and as your income grows, you can comfortably handle higher EMIs.
b. Shortening the Loan Tenure: Another approach is to increase your EMI amount to shorten the loan tenure. By paying higher EMIs, you can repay the loan faster, saving on interest costs. However, this strategy requires careful consideration of your monthly budget and financial capabilities.
It’s important to note that prepayment and EMI increase strategies may involve additional costs, such as prepayment penalties or processing fees. Therefore, it’s advisable to review your loan agreement and consult with your lender to understand the specific terms and conditions associated with these strategies.
Before implementing any strategy, consider your overall financial situation, future income projections, and other financial goals. It’s recommended to seek advice from a financial advisor who can provide personalised guidance based on your circumstances and help you make informed decisions.
EMI increasing based loan closing Example
To calculate the impact of increasing the Equated Monthly Installment (EMI) on the closing of a home loan, you need to consider factors such as the loan amount, interest rate, tenure, and the desired increased EMI. Let’s consider an example using Indian Rupees (INR):
Example: You have a home loan of INR 50 lakhs (5,000,000) for a tenure of 20 years at an interest rate of 8% per annum. Let’s assume your current EMI is INR 40,000.
Step 1: Calculate the remaining number of EMIs. To determine the remaining number of EMIs, you need to consider the tenure and the number of EMIs already paid.
In this example, let’s assume you have already paid 10 years’ worth of EMIs, which is 10 * 12 = 120 EMIs.
Remaining EMIs = Total number of EMIs – EMIs already paid Remaining EMIs = 20 years * 12 – 120 Remaining EMIs = 240 – 120 Remaining EMIs = 120 EMIs
Step 2: Calculate the total outstanding loan balance. To calculate the total outstanding loan balance, you can use the formula:
Outstanding Loan Balance = Principal loan amount * [(1 + r)^n – (1 + r)^p] / [(1 + r)^n – 1]
where, P = EMIs already paid n = Total number of EMIs r = Monthly interest rate
In this example: Principal loan amount = INR 50 lakhs (5,000,000) P = 120 EMIs n = 240 EMIs r = 8% per annum / 12 (monthly interest rate)
Plugging in the values:
r = 8% / 12 = 0.00667
Outstanding Loan Balance = 5,000,000 * [(1 + 0.00667)^240 – (1 + 0.00667)^120] / [(1 + 0.00667)^240 – 1] Outstanding Loan Balance ≈ INR 23,84,136
So, the total outstanding loan balance is approximately INR 23,84,136.
Step 3: Calculate the increased EMI required for loan closure. To determine the increased EMI required to close the loan, subtract the outstanding loan balance from the total loan amount and divide it by the remaining number of EMIs.
Increased EMI = (Principal loan amount – Outstanding Loan Balance) / Remaining EMIs Increased EMI = (5,000,000 – 23,84,136) / 120 Increased EMI ≈ INR 18,797
Therefore, to close the loan within the remaining 120 EMIs, you would need to increase the EMI to approximately INR 18,797.
It’s important to note that any increase in EMI may impact your monthly budget, and you should ensure that the increased EMI is manageable within your financial capabilities. Consulting with your lender and assessing the impact on the overall loan repayment is advisable before making any changes to your EMI.