Home Loan Prepayment: How to save Rs 10 lakh on Rs 50 lakh home loan? Here's how 1 extra EMI/year can help you save huge interest cost

Home loan Prepayment: Home loan is most likely large amount. Since one takes a home loan for a long duration, such as 25 years, they pay huge interest along with the principal amount in all those years. If you somehow save this interest on your loan, your repayment amount may decrease significantly. One of the most tested and effective strategies to reduce your interest on principal is prepayment. It may be in the form of paying one extra EMI every year or paying a 10 per cent higher EMI every year. Know how you can use these tactics to reduce your home loan repayment substantially.

What is a home loan prepayment?

Home loan prepayment is a facility that allows the borrower to repay their housing loan (in part or in full) before the completion of their loan tenure. In simple words, it is an early repayment of a loan before its due date. Prepayment can be made either by paying a lump sum amount or by paying a few extra EMIs.

Also read--Home Loan Insurance: Who repays loan when borrower dies? Is home loan insurance necessary?

Firstly, one needs to understand how lower home loan tenure and higher EMIs impact total interest costs and total repayment. 

For instance, borrowers A, B, and C have separate home loans of Rs 50 lakh each with a home loan tenure of 20, 15, and 10 years, respectively. In such a case, the EMI generated for all three borrowers will differ. Hence, the interest cost generated over the period of time as well as the total repayment by the borrowers will also be different. Here's the calculation:

Paying one extra EMI every year

In this scenario, if borrower 'B' chooses to pay one extra EMI every year on a loan amount of Rs 50 lakh of the 20-year duration (at an interest rate of 8.50 per cent). In that case, the EMI will be Rs 43,391. If 'B' decides to pay Rs 43,391 (one extra EMI) every year, they will save Rs 10,29,136 due to prepayment, and the duration will reduce to 16 years, i.e., they'll be able to finish the loan 4 years early.

Here's how the interest cost savings on prepaying 1 EMI per year, according to Ratan Chaudhary, Head of Home Loans, Paisabazaar:

Also read--NPS: Tax benefits of Rs 2 lakh and monthly pension of Rs 75,000; here is how it works

10 per cent higher EMI prepayment every year

In the second scenario, for instance, borrower 'C' has taken a home loan of Rs 50 lakh with an interest rate of 8 per cent for 20 years. Here's how it can be finished earlier with the help of a 10 per cent prepayment:

If the borrower prepays a 10 per cent extra amount every year, they prepay the entire loan in a shorter period of time. AR Hemant, AVP, BankBazaar.com, suggests 10 per cent pre-payment in the following two ways:

One: Let’s say you pre-pay 10 per cent of the loan balance once every 12 months. Since the loan has a reduced balance, your 10 per cent pre-payment also gets smaller each year. This way, the loan is paid off in about 111 months, saving Rs 31.20 lakh in interest.

Two: If you’re prepaying 10 per cent of the loan once every 12 months, which is Rs 5 lakh. This is a much more aggressive pre-payment plan. It will finish your loan in about 84 months, with interest savings of Rs 34.80 lakh.

ALSO READ: NPS vs mutual fund SIP: Which is a better investment plan for retirement? | Explained