The benefits of partial prepayment are invaluable. It guarantees savings in interest expenses and sometimes it is more beneficial than tax savings. Some of the benefits are as follows-
1. Guaranteed saving in interest expenses
When loan tenure comes down, the interest expenses see a dip as well since the number of years for which interest has to be paid comes down. This is guaranteed saving in interest expenses while investing money for better return might not always mean saving. Under section 80C, prepayment of principal leads to reduction in debt and hence one could reap the benefits of reduced interest expenses.
2. Sooner the prepayment better the savings
In the beginning of the payment period of home loan, the interest rate is highest and therefore partial prepayment of principal in this period will be more meaningful than prepayment done on the later years. For example, if at the end of one year someone has prepaid an amount of Rs.3 lakh for a loan of Rs.30 lakh at interest rate of 11 percent for 30 years, he would be able to save Rs.15 Lakh. While partial prepayment done at the end of 5 years for the same amount of loan at the same interest and tenure would lead to savings of only Rs.9.8 lakh. Hence, sooner the prepayments better the savings.
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