Reduce Home Loan EMI vs Reduce Tenure: Rs 75 lakh, 25-year loan; which option can save Rs 25 lakh and 64 months and how? Know here

Reduce Home Loan EMI or Reduce Loan Tenure: Residential properties in many parts of India are expensive. For the majority, it is nearly impossible to buy a home from scratch with just savings and monthly income. So they have to rely on home loans.

These loans surely fulfil their requirement of buying a home in a real estate market where the prices often rise faster than growth in the average salary of the majority.

Plus, one takes a home loan for 20 years or more.

So, the interest that they pay during this tenure surpasses the principal amount that they repay during the loan duration.

However, since the income with time increases, it brings opportunity before borrowers to opt for prepayment and reduce the amount of interest.

Prepayment options come with a lock-in period of 1-3 years.

When the borrower informs the bank about prepaying their loan, the lender gives them two options: reducing loan equated monthly instalment (EMI) or reducing tenure.

This is an important stage of the loan, so the borrower should not feel confused while deciding between the two options.

They should do math to know which option can help them in the long run.

In this write-up, we will discuss both options and tell which of them can help one save an estimated Rs 25 lakh on a Rs 75 lakh, 25-year loan.

Reducing EMI

When you reduce EMI, the duration of the loan remains the same, but the EMI becomes shorter.

E.g., if one takes a Rs 50 lakh home loan for 20 years at 9.5 per cent interest rate, and prepays Rs 5 lakh after 3 years, if they go for a lower EMI, their estimated EMI will be reduced from Rs 46,607 to Rs 41,658, or by Rs 4,949.

The estimated savings after the prepayment will be Rs 5,09,576.

However, if the same person opts for a reduced tenure, their EMI will remain the same, but their tenure will be shortened by 44 months, and the estimated savings on interest will be Rs 15,90,441.   
But even then, people may go for a lower EMI by choice. The reasons can be- they are unable to pay the EMI, they require money for some other purpose, or they want to use the saved amount for some investment.  

Reducing tenure

When you opt for reducing the tenure after making a prepayment, the EMI remains the same, but the tenure may decrease significantly, and the amount you save on interest can be much greater than the amount saved in case of a reduced EMI.

Borrowers who are in a position to continue their EMI without any hassle opt for reducing tenure.

The option of reducing tenure can lighten the psychological burden of the loan from the borrower's mind since they don't need to pay a full EMU for the entire period.

Since one takes a home loan for a long duration, their income is most likely to increase during that time.

So, continuing the original EMI may not be an uphill task for such a borrower. 

Home loan calculation

We are taking the example of a Rs 75 lakh loan for 25 years at 9.50 per cent annual interest. 

What will be EMI and interest? 

The estimated EMI will be Rs 65,527, the estimated interest will be Rs 1,21,58,175, and the estimated repayment amount will be Rs 1,96,58,175.   

Prepayment conditions

There will be 3 prepayments of Rs 2,50,000 each (total Rs 7,50,000, or 10% of the loan amount) in the 3rd, 4th, and 5th year of the loan (in November 2027, November 2028, and November 2029).

What if one opts for a reduced EMI?

The estimated reduced EMI in such a case will be 58,642, Rs 6,885 fewer than its earlier EMI of Rs 65,527.

The estimated interest saved thus will be Rs 9,84,207.

What if one opts for a reduced tenure?

After making 3 prepayments of Rs 2,50,000 each, the estimated tenure will be reduced from 300 months to 236 months (a benefit of 64 EMIs).

The estimated amount saved due to these prepayments will be Rs 34,76,282.

How much money will be saved with reduced tenure?

The estimated money saved by opting for a reduced tenure instead of a lower EMI amount will be Rs 24,92,075.

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for retirement planning.)