How to Use Home Loan Prepayment Calculator to Reduce EMI or Tenure in Excel

Home loans are a long-term financial commitment that can take several years to repay. However, many borrowers prefer to pay off their loans early to reduce the total interest paid and to become debt-free sooner. Home loan prepayment is a popular option that allows borrowers to make additional payments towards their loan principal, which can help reduce the total interest paid and shorten the loan tenure. But how can you calculate the impact of prepaying your home loan? This is where a home loan prepayment calculator can come in handy.

What is a Home Loan Prepayment Calculator?

A home loan prepayment calculator is a tool that helps you calculate the impact of prepaying your home loan. It takes into account your current loan balance, interest rate, loan tenure, and the prepayment amount to show you how much you can save in terms of interest and how it can impact your EMI or tenure. The calculator helps you understand whether it is beneficial to prepay your home loan or not.

How to Use a Home Loan Prepayment Calculator in Excel

Excel is a powerful tool that can help you create your own home loan prepayment calculator. Here are the steps to create a home loan prepayment calculator in Excel:

Step 1: Open a new Excel sheet and create the following columns: Loan Amount, Interest Rate, Loan Tenure, EMI, Prepayment Amount, Total Payment, Interest Paid, and Tenure Reduced.

Step 2: Enter the loan amount, interest rate, and loan tenure in the respective columns.

Step 3: Use the PMT function to calculate the EMI. The formula for calculating the EMI is as follows:

=PMT(rate/12,tenure*12,-loan amount)

For example, if the interest rate is 8%, the loan amount is ₹50 lakhs, and the loan tenure is 20 years, the EMI will be calculated as follows:

=PMT(8%/12,20*12,-5000000)

This will give you the EMI value.

Step 4: Enter the prepayment amount in the respective column.

Step 5: Use the FV function to calculate the total payment after prepayment. The formula for calculating the total payment is as follows:

=FV(rate/12, (tenure*12)-no of prepayment months, -EMI-prepayment amount)

For example, if the interest rate is 8%, the loan amount is ₹50 lakhs, the loan tenure is 20 years, the EMI is ₹44,986, and the prepayment amount is ₹5 lakhs, the total payment after prepayment will be calculated as follows:

=FV(8%/12, (20*12)-12, -44986-500000)

This will give you the total payment value.

Step 6: Calculate the interest paid using the following formula:

=total payment-loan amount

For example, if the loan amount is ₹50 lakhs and the total payment after prepayment is ₹60 lakhs, the interest paid will be calculated as follows:

=6000000-5000000

This will give you the interest paid value.

Step 7: Calculate the tenure reduced using the following formula:

=tenure-(no of prepayment months/12)

For example, if the loan tenure is 20 years and the prepayment is done after 2 years, the tenure reduced will be calculated as follows:

=20-(2/12)

This will give you the tenure reduced value.

Step 8: Use conditional formatting to highlight the cells with the lowest interest paid and tenure reduced.

What is a home loan prepayment calculator?
A home loan prepayment calculator is a tool that allows borrowers to calculate the potential savings on their home loan by making prepayments. The calculator takes into account factors such as the outstanding loan amount, interest rate, and the frequency and amount of prepayments to give an estimate of the reduced EMI or tenure.

How does a prepayment calculator help reduce EMI or tenure?
A prepayment calculator helps borrowers understand the impact of making prepayments on their home loan. By making additional payments towards the loan principal, the outstanding loan amount reduces, and so does the interest payable. This reduction in interest can lead to a lower EMI or a shorter tenure, depending on the prepayment amount and frequency.

Is it better to reduce EMI or tenure when making prepayments?
Whether to reduce EMI or tenure depends on the borrower’s financial situation and goals. If the borrower wants to reduce the overall interest payable, it is better to reduce the tenure as it leads to a faster repayment of the loan. On the other hand, if the borrower wants to have more disposable income every month, reducing the EMI may be a better option.

Is using a prepayment calculator accurate?
A prepayment calculator can give a fairly accurate estimate of the savings that can be achieved through prepayments. However, it is important to note that the actual savings may differ depending on factors such as the frequency of prepayments and the interest rate fluctuations.

Are there any prepayment charges levied by banks?
Some banks may charge prepayment fees or penalties for making prepayments. It is important to check with the bank about any such charges before making prepayments.

How frequently can I make prepayments on my home loan?
The frequency of prepayments depends on the terms and conditions of the loan agreement. Most banks allow prepayments to be made once a year, while some may allow more frequent prepayments. It is important to check with the bank before making any prepayments.

Is it always advisable to make prepayments on a home loan?
Making prepayments on a home loan is not always advisable, especially if the borrower has other high-interest loans or investments that can yield higher returns. It is important to weigh the pros and cons before making prepayments on a home loan.

Can I use a prepayment calculator for other loans?
Prepayment calculators can be used for other loans such as car loans or personal loans. However, the calculations may differ based on the interest rate, loan amount, and tenure of the loan.