Possible to save Rs 34 lakh interest on Rs 65 lakh home loan? How prepayment helps the borrower
Home Loan Calculations: The option of prepayment in a home loan can help one save a considerable amount if the option is used wisely. Prepayment can be in parts or a one-time lump sum. Either way, the interest amount and the tenure can be reduced.
Interest Saving by Prepayment: In the initial stage of a home loan, the borrower sets the equated monthly instalment (EMI) according to their monthly income. They set it at a level where they can also meet their other obligations without defaulting on the loan. Financial experts say that the home loan EMI should not be more than 35 per cent or 40 per cent of the monthly income. But as the borrower's income increases, their repayment capacity also increases. They can use this opportunity to reduce their interest amount through certain methods. Know what those methods are and how one can reduce the interest amount by Rs 34.11 lakh on a Rs 65 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 to reduce interest amount
One can reduce the interest amount through prepayment. Prepayment can be in parts, where the borrower can make more than one prepayment. Or, it can be a full prepayment, where the borrower makes a lump sum prepayment and forecloses the loan. The prepayment lock-in period or the prepayment amount limit can vary from bank to bank.
Paying an additional EMI
The other form of prepayment can be to pay an additional EMI every year. The borrower can start repaying an additional EMI some years after the loan begins.
Example of prepayment
A person takes a home loan of Rs 50 lakh at 9.5 per cent interest rate for 25 years. Their estimated EMI will be Rs 43,685, the estimated interest will be Rs 81,05,450, and the estimated repayment will be Rs 1,31,05,450.
Example of prepayment
The person decides to make a 10 per cent prepayment of the principal amount after 3 years. They will save estimated Rs 25,07,208 in interest and 72 months in tenure.
Example of additional EMI
Take the example of the same loan, where the loan amount is Rs 50 lakh, the interest rate is 9.5 per cent, and the tenure is 25 years.
If one makes one additional EMI every year, the estimated interest saved will be Rs 23,42,789, and the estimated tenure will be reduced from 300 months to 228 months.
Home loan calculations
We are taking the example of Rs 65 lakh home loan, where the interest rate is 9.5 per cent and the loan tenure is 25 years.
What will be home loan EMI?
The estimated EMI will be Rs 56,790.
What will be interest and repayment?
The estimated interest will be Rs 1,05,37,085, and the estimated repayment will be Rs 1,70,37,085.
What will be prepayment amount?
The prepayment amount will be 12 per cent of the principal amount. Since the principal is Rs 65 lakh, the prepayment will be Rs 7,80,000.
What will be frequencies of prepayment?
The Rs 7,80,000 prepayment will be made in 3 equal instalments. For a home loan started in December 2024, the first prepayment instalment will be made in January 2028, second in January 2029, and the third in January 2030.
How much interest will be saved?
The estimated interest saved will be Rs 34,10,166.
How much time will be saved?
The estimated time saved will be 73 months (6 years and 1 month).
What if 12% prepayment is made in one go?
If one makes a 12 per cent prepayment of the principal amount on completion of 3 years of the loan, the estimated amount saved will be Rs 37,08,816, and the estimated tenure saved will be 79 months (6 years and 7 months).