Home Loan Interest Saving: How prepayment of 12% of principal amount can help save Rs 26.78 lakh and 65 months on Rs 55 lakh, 20-year home loan
Home Loan Prepayment: Home loan prepayment is an effective strategy to reduce loan interest to a great extent. Even if one opts for a prepayment(s) equal to 10%-15% of their principal, they can cut down on their interest significantly.
Home Loan Prepayment: Buying a home can be an important financial goal in one's life. But when they take a loan to purchase a home, they often pay a much higher interest amount than their principal. Since home loans are for a long duration, the borrower faces the problem of paying high interest for a long duration. But there can be tactics such as prepayment that can not only cut the interest amount significantly but can also shorten loan duration. In this write-up, know how prepayment in 3 phases of a 12 per cent amount of the principal amount can reduce the estimated interest amount by Rs 26.78 lakh and the estimated tenure by 5 years and 5 months on a Rs 55 lakh, 20-year loan.
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(Disclaimer: Our calculations are projections and not investment advice. Do your own due diligence or consult an expert for financial planning.)
How prepayment works in a home loan
Prepayment is an additional payment of the loan other than the regular equated monthly instalment (EMI). It can be made anytime before the closure of the loan. One can opt for one prepayment or more depending on the conditions given in their home loan document. Some lenders may charge a prepayment fee; prepayment may also result in some tax losses, but it can reduce the interest amount and loan tenure to a great extent.
How prepayment money can be arranged
If one gets a bonus, windfall, share in property, or return from an investment, they may use that money. Or if their income increases, it can be arranged from there also.
Home loan calculation
For our home loan calculation, we will take the example of a Rs 55 lakh home loan for 20 years at an interest rate of 9.5 per cent.
What will be EMI?
The estimated EMI on such a loan will be Rs 51,267.
What will be interest and repayment?
The estimated interest on the loan will be Rs 68,04,132, while the estimated repayment will be Rs 1,23,04,132.
What will be prepayment amount?
Since we are taking 12 per cent of the principal as the prepayment amount, it will be Rs 6,60,000 (12% of Rs 55,00,000).
How prepayment can be made
We will show how 3 prepayments of Rs 2,20,000 each will help save tax. For a loan started in October 2024, the prepayment will be made in November 2026, the second in November 2027, and the third in November 2028.
How will it impact home loan?
After all 3 prepayments are made, the new revised estimated interest will be Rs 41,26,045.
How much money will be saved?
The estimated interest thus saved will be Rs 26,78,087.
What will be new loan duration?
The new estimated tenure will be 175 months, so it will save 65 months, or 5 years and 5 months.
What if EMI amount is reduced and tenure is same?
After 3 prepayments, if one opts for a lower EMI and the same loan tenure of 20 years, their estimated EMI will be reduced from 51,267 to Rs 45,087, but they will save only estimated Rs 8,14,938 in interest.