A Dashain bonus, a matured fixed deposit, money from a sold plot: sooner or later most borrowers have a lump sum and a question. Should it go into the loan? Almost always yes, but how you do it changes the saving by a factor of three, and a few situations exist where prepaying is the wrong move. This guide gives you the rules and the numbers.
What prepayment means
Prepayment is paying part or all of the principal before it is due. Two kinds:
- Partial prepayment: a lump sum on top of your regular EMI.
- Full prepayment or foreclosure: closing the loan entirely, either from your own money or by refinancing with another bank, which banks call a loan swap.
Because interest is charged on the outstanding balance every month, any principal you remove stops earning interest for the bank from that day.
What the penalty is
Nepal Rastra Bank caps prepayment charges and requires them to be stated in the sanction letter. In practice:
- Floating-rate loans repaid from your own funds: many banks charge nothing; others charge up to 1% of the amount prepaid, often only within the first one or two years.
- Loan swap to another bank: a charge of up to 1 to 2% is common, because the bank is losing the customer, not just the balance.
- Fixed-rate loans during the fixed period: higher, sometimes 2% or more, since the bank hedged its funding to match your rate.
- Personal and auto loans: often locked for six months, then 0 to 1%.
Read the exact clause before you pay. If it is not in your sanction letter, ask for it in writing.
The maths on a home loan
Start with a Rs 50 lakh loan at 9% over 20 years. EMI is Rs 44,986. After three years of payments the balance is about Rs 46.9 lakh and 204 EMIs remain, carrying roughly Rs 44.9 lakh of future interest.
Now prepay Rs 5 lakh. You get to choose one of two outcomes:
Option A: keep the EMI, shorten the tenure
The balance drops to Rs 41.9 lakh but you continue paying Rs 44,986. The loan now ends after about 161 more months instead of 204, three and a half years early. Future interest falls to about Rs 30.3 lakh.
Interest saved: about Rs 14.5 lakh, for a penalty of at most Rs 5,000.
Option B: keep the tenure, reduce the EMI
The bank recalculates the EMI on Rs 41.9 lakh over the same 204 months. The new EMI is about Rs 40,190, roughly Rs 4,800 a month lower. Future interest falls to about Rs 40.1 lakh.
Interest saved: about Rs 4.8 lakh.
Same Rs 5 lakh, three times the saving. Unless your monthly budget is genuinely under strain, always ask for Option A. Many branches default to Option B because it is easier for their system, so say it explicitly.
Use the EMI calculator to test your own amount and timing; the earlier in the loan you prepay, the larger the saving, because early EMIs are mostly interest.
When prepayment does not make sense
- You would empty your emergency fund. Keep three to six months of expenses in cash first. A loan can be prepaid later; a medical bill cannot wait.
- Your money earns more than the loan costs, after tax. Rare in Nepal, since fixed deposit rates usually sit below lending rates. But if you hold a fixed deposit at 10% and your loan costs 8.5%, leave it. Check the after-tax deposit rate.
- The loan is nearly over. With a year left on Rs 5 lakh at 9%, remaining interest is around Rs 25,000. A 1% fee on prepayment is Rs 5,000. Still positive, but small; do not sell an asset at a bad price to do it.
- You have costlier debt. Clear a credit card at 27% or a personal loan at 14% before touching a home loan at 9%.
- A fixed-rate loan with a heavy penalty and a short fixed period left. Wait for the fixed period to end, then prepay free.
Refinancing counts as prepayment
If a cheaper bank will take over your loan, the old bank treats it as a full prepayment and applies the swap charge. Add the new bank's processing fee, the mortgage re-registration at the Malpot office and a fresh valuation. On a Rs 40 lakh balance, switching costs typically Rs 40,000 to 80,000. A rate difference of 1 point saves about Rs 40,000 a year at that balance, so the switch pays for itself within two years if you have at least five years left. The refinance calculator does this calculation with your bank's real numbers.
How to prepay without drama
- Give the branch a written request stating the amount and "reduce tenure, keep EMI".
- Pay by transfer, not cash, and collect an updated repayment schedule the same week.
- Check the next month's EMI debit matches the new schedule. Errors happen, and they compound.
- After full prepayment, collect the no-dues letter, the release of the mortgage (fukuwa) and your original lalpurja, and confirm the loan shows as closed on your CIB report a month later.