Home Loan Prepayment Calculator

Not always. If your loan has a low interest rate below 5 or 6 percent you might earn more by investing the extra money in assets with higher potential returns like equity mutual funds. However if your loan rate is high above 8 percent or you are risk averse or near prepayment gives you peace of mind and guaranteed savings it is often the better choice. Also consider whether your lender charges prepayment penalties which can reduce the benefit of early repayment.

Prepayment penalties vary by lender and loan type. In many countries regulations have reduced or eliminated these penalties especially for floating rate loans. However some fixed charge penalties of 1 to 3 percent on the prepaid amount particularly during the fixed rate period. Always check your loan agreement for specific prepayment terms before making extra payments as the penalty could offset some of your interest savings.

Reducing the tenure is usually more beneficial in terms of total interest savings. When you reduce the tenure your EMI stays the same but you pay off the loan faster saving more interest. When you reduce the EMI your monthly payment decreases but the tenure stays the same resulting in less interest savings. However if your monthly cash flow is tight reducing the EMI can provide breathing room. The calculator shows both options so you can decide based on your priorities.

There is no one size fits all answer but a good rule of thumb is to allocate 10 to 20 percent of your monthly income toward loan prepayment after accounting for all expenses and emergency fund contributions. Even an extra 10 to 20 percent of your regular EMI can make a significant difference over time. For example on an EMI of $2,000 paying an extra $200 to $400 per month can save tens of thousands in interest and shorten your loan term by several years.

The earlier you make prepayments in the loan tenure the more interest you save because the principal balance is highest in the early years. In the first third of a loan term most of your EMI goes toward interest so prepayments during this period have the maximum impact. However even prepayments in the later years save money compared to not prepaying at all. Any time you have surplus funds beyond your emergency fund is a good time to consider loan prepayment.