Reduce Home Loan EMI vs Reduce Tenure: Which prepayment option can save Rs 32.30 lakh on Rs 75 lakh loan? See calculations
Reduce EMI vs Reduce Tenure: Home loan borrowers who want to close their loan early or want to reduce their tenure and interest amount may opt for prepayment. It can save a substantial amount and shorten their loan tenure by many years. Know how it works.
Reduce Home Loan EMI vs Reduce Tenure: When you are repaying a home loan, you need to spend a substantial amount in interest. In loans of 20 years or over, the interest amount can easily surpass the principal. But there are options such as prepayment, which can help you save a substantial amount on the loan. Banks mostly have a 1-3 year lock-in period for prepayment. After that, the home loan borrower can either make a prepayment in one go or in instalments. Either way, they can save a substantial amount. Banks also give them the option to shorten their loan tenure. Know how the prepayment option works and how one can save Rs 32.30 lakh on a Rs 75 lakh, 25-year loan.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
How prepayment works
Once the lock-in period for prepayment is over, a home loan borrower can make a prepayment in one go. Or, if they want, they repay it in instalments. If they don't have a substantial amount, they can also ask their bank to allow them to pay an additional equated monthly instalment (EMI) every year.
How it saves interest
Before knowing that, let's see a couple of examples of how the loan interest can be higher than the principal in long-tenure loans.
A borrower wants to take a home loan of Rs 60 lakh at a 10 per cent interest rate. Let's see what the interest amounts will be if they take it for 20, 25, and 30 years.
In 20 years, the estimated EMI will be Rs 57,901, the estimated interest will be Rs 78,96,312, and the estimated repayment will be Rs 1,38,96,312.
If they take it for 25 years, the estimated EMI will be Rs 54,522, the estimated interest will be Rs 1,03,56,613, and the estimated repayment will be Rs 1,63,56,613.
How it saves interest
If they take it for 30 years, the estimated EMI will be Rs 52,654, the estimated interest will be Rs 1,29,55,546, and the estimated repayment will be Rs 1,89,55,546.
Here, you can see that the interest amount is increasing substantially with the loan tenure.
Now, in the initial stage of the loan, the borrower may feel financially stretched when repaying the loan. But as their income rises, they may feel increasing their EMI or repaying their loan. In either case, they will save a substantial amount.
What options banks give when one repays loan
The bank gives two options- either the borrower can keep their EMI as the same as before repayment, or they can opt for a lower EMI.
What difference these options make
If the borrower lowers their EMI, their loan tenure will remain the same, but their interest amount will be cut.
If the borrower keeps their EMI the same as before, the loan tenure and interest amount will be cut.
Home loan calculations
We will take the example of a Rs 75 lakh loan for 25 years, where the interest rate will be 10 per cent.
What will the EMI be?
The estimated monthly EMI will be Rs 68,153.
What will be interest and repayment amounts?
The estimated interest on this loan will be Rs 1,29,45,767, and the estimated repayment will be Rs 2,04,45,767.
When will prepayment be made?
For a loan started in January 2025, the first prepayment will be made after a 3-year lock-in period, which means, in February 2028, the second in February 2029, and the third in February 2030.
What will be prepayment amount?
We are taking 10 per cent of the principal as the prepayment amount. It means Rs 7.5 lakh for a Rs 75 lakh loan.
We will not make one prepayment of Rs 7.50 lakh, but will make 3 prepayments of Rs 2.50 lakh each.
What impact will it make?
The bank will give two options- either to reduce the EMI or to keep it the same as before making the prepayment. We will show how both options will pan out.
What will happen if borrower lowers EMI?
In that case, the loan tenure will remain the same, but the revised estimated EMI will be Rs 62,442, Rs 5,710 less than the original EMI of Rs 62,442.
What will happen if borrower keeps same EMI?
In that case, the estimated loan tenure will reduce from 25 years to 20 years and 4 months, so the tenure will be 4 years and 8 months shorter.
How much interest will be saved?
The estimated interest saved will be Rs 32,29,324.