Hello Members,

I have a doubt regarding the housing loan prepayment charges. I believe the penalty varies between banks but its generally between 0-2% on the outstanding principal. Do you know what happens to the interest amount thats already been paid to the bank? The EMI contains more of interest initially rather than the principal so if I prepay my entire loan say within 1 year (and the loan period was say 15 years), I would have paid lot of interest to the bank already. Is that adjusted in the outstanding principal when one decides to prepay the entire loan amount?

Regards
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  • Originally Posted by varun007
    Hello Members,

    I have a doubt regarding the housing loan prepayment charges. I believe the penalty varies between banks but its generally between 0-2% on the outstanding principal. Do you know what happens to the interest amount thats already been paid to the bank? The EMI contains more of interest initially rather than the principal so if I prepay my entire loan say within 1 year (and the loan period was say 15 years), I would have paid lot of interest to the bank already. Is that adjusted in the outstanding principal when one decides to prepay the entire loan amount?

    Regards


    Hahaha .. we wish !!! no the amount of interest is kept hugh in initial years so as to avoid prepayement scenario , and the interest is kept with the bank only , if one closes the a 15-20 yrs loan in one yr , then generally one has to shell out approx equal to or even more than one has borrowed from the bank plus the one year emi payments that have alredy gone !!
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  • unfair!

    Originally Posted by ISHANb
    Hahaha .. we wish !!! no the amount of interest is kept hugh in initial years so as to avoid prepayement scenario , and the interest is kept with the bank only , if one closes the a 15-20 yrs loan in one yr , then generally one has to shell out approx equal to or even more than one has borrowed from the bank plus the one year emi payments that have alredy gone !!


    Thanks for confirming my fears!

    I think RBI is doing such a wonderful job to benefit banks!
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  • Nope ISHANb is not correct. Sometime I wonder how can people spend so much money without knowing the basics of things.

    Ok ... I strongly suggest you meet someone who who of finance and mortagage - could be your friend who works in bank, an MBA or CA or even the brokers who arranges for the load. He/she will make it very clear on how it works. It's not as illogical as you all made it sound.

    Now that i have said so much, let me try to explain you as briefly as possible

    1. There is pre-payment charge which varies from 0-2%. For home loan (not plots), govt has forced bank to keep it as low as possible. I know for sure that Axis banks does not charge anything if it's a home loan.

    2. During initial years, the interest portion is more because your outstanding Principle is more. As the time passes, your outstanding Priciple becomes less and so more of EMI goes in reducing your principle.

    let me explain in a crude example.
    Say you took loan of 20Lakh and you're paying EMI of 25K per month.
    First month you pay interest as 20K and 5K goes to your principle payment. Your outstanding Principle is 20 Lakh.
    Second month your outstanding Principle will be 19,95,000. So this month the 25K that you pay 19.5K will go for interest payment (coz Principle is less) and 5.5K will go to reduce your outstanding Principle.

    As the time passes the EMI will remiain the same 25K, but the Interest component of that 25K will reduce and Principle repayment incrase.

    Few months befor your loan closes say 24K will go for your Principle and 1K as interest (it's not because bank wants priciple that way, but because your outstanding loan will become so less that it needs only 1K of interest payment).

    Not sure if my example was easy to comprehend, but belive me I find it little frustrated when people pass "motherhood statement" without understanding how things works. I strongly suggest to talk to someone who is not "financial education" challenged.

    Cheers




    Originally Posted by ISHANb
    Hahaha .. we wish !!! no the amount of interest is kept hugh in initial years so as to avoid prepayement scenario , and the interest is kept with the bank only , if one closes the a 15-20 yrs loan in one yr , then generally one has to shell out approx equal to or even more than one has borrowed from the bank plus the one year emi payments that have alredy gone !!
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  • It happens like this: You take a loan of Rs 1Lakh 10% per annum(simple interest for the sake of example, it is Compund interest in actual).
    Say you fixed your emi for for 1000/-

    Month 1:
    Outstanding Principal: 1Lakh
    Interest for 1 month: 100000*10/100/12 = 833.33/-

    So, the interest payment is Rs. 833.33/- and principal payment is Rs.166/-

    Month 2:
    Outstanding Principal = (100000-166) = 99834
    Interest for 2nd month = 99834*10/100/12= 831.95
    Principal part = (1000-831.95) = 168.05
    Interest part = 831.95/-

    In effect, the bank charges you the interest for lending the money on a monthly basis. Based on the tenure and your repayment capacity, the bank fixes the EMI. With each month, this outstanding principal gets reduced and hence the interest payment goes on reducing....
    Hope it is clear now..
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  • so that is waht i said , but if you take a 15 yr home loan , and finish it off in one year only , then there is very much of interest in it and less amount of principal , and adding the the forclosure charges , it generally comes out to be around the same what you would have borrowed from the bank .(some banks also charge 3-4 % as preclosure charges) ......

    and also the amount paid as interest during the one yr is to the benefit of the bank and one does not get any adjustment in principal amount for that interest paid , that is what the question was .... buddy vikhash kumar this was a particular case study , study the case ,you get some knowledge and then talk not the other way round !!
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  • Originally Posted by ISHANb
    so that is waht i said , but if you take a 15 yr home loan , and finish it off in one year only , then there is very much of interest in it and less amount of principal , and adding the the forclosure charges , it generally comes out to be around the same what you would have borrowed from the bank .(some banks also charge 3-4 % as preclosure charges) ......

    and also the amount paid as interest during the one yr is to the benefit of the bank and one does not get any adjustment in principal amount for that interest paid , that is what the question was .... buddy vikhash kumar this was a particular case study , study the case ,you get some knowledge and then talk not the other way round !!

    I dont think so Ishanb. If you finish off your home loan in 1 year, you only pay the interest for 1 year(which you would have paid normally) plus some pre-closure charges. You will pay much less interest than if you had continued.
    If you want, you can easily make an excel sheet on the basis of calculation given above and verify the same...
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  • Housing loan pre-close

    Could someone say if I have any benefit if I pre-close my housing loan? My case is as below:
    I have taken housing loan of 10 laks for a period of 10 years from Federal Bank and started repayment of EMI Rs. 20,000/-from July 2008. My present balance is Rs. 540439/-, I wish to payback this amount and close the loan in July 2012 with a restructured EMI. The bank may demand 2% pre-closer charge.
    PramodKumar
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  • Its always good if u prepay with minimum prepayment charges

    No one is at loss as per explained above by Vikash

    Its all pretty standard
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  • Do not Repay

    Originally Posted by madambath
    Could someone say if I have any benefit if I pre-close my housing loan? My case is as below:
    I have taken housing loan of 10 laks for a period of 10 years from Federal Bank and started repayment of EMI Rs. 20,000/-from July 2008. My present balance is Rs. 540439/-, I wish to payback this amount and close the loan in July 2012 with a restructured EMI. The bank may demand 2% pre-closer charge.
    PramodKumar


    10 Years at 10 % interest will make the EMI of 13215 and not 20 K. I think some information must be missing. But one thing is sure that you must have paid more than 50 % of total interest on total amount of your loan. If you repay now, you will be paying the principle as a major portion which will not make much sense. In next 7 Years you will pay only leftover of interest. Better not repay. 2 % will be an extra charge over the previous analysis (Paise dene ka bhe paisa lagta hai :).

    For more details just try to see your amortization schedule here:

    LoanWala: Loan Amortization Schedule
    or
    Loan Amortization calculator | Amortization Calculator
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  • Originally Posted by madambath
    Could someone say if I have any benefit if I pre-close my housing loan? My case is as below:
    I have taken housing loan of 10 laks for a period of 10 years from Federal Bank and started repayment of EMI Rs. 20,000/-from July 2008. My present balance is Rs. 540439/-, I wish to payback this amount and close the loan in July 2012 with a restructured EMI. The bank may demand 2% pre-closer charge.
    PramodKumar


    For peace of mind, its always better to ignore the mathematics involved and prepay the loan amount that's pending.
    Also there are a few banks who do not charge prepayment penalty charges like axis bank, idbi bank.
    Eventually there are every type of customers in the market. Few look for "Good Services" but for most of them, it doesn't matter once you have taken a loan.
    Most of the service class customers take ECS facility and they hardly need anything from the bank in terms of services except annual statement for tax benefits.
    My POV is that banks offering these schemes where they don't levy any penalty in prepayment should be explored before taking housing loans.
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