Home Loan Calculator: How 10% prepayment of principal can save Rs 35.11 lakh and 5 years and 8 months on Rs 70 lakh, 25-year loan
Home Loan Calculator: Prepayment is an effective way to reduce interest rate and tenure on a home loan. The timing of prepayment is important as making it early helps one save more money on interest than saved when they delay it.
Home Loan Calculator: Home loans are for long durations, so it is very obvious for a borrower to repay a higher interest amount than the principal. The longer the duration, the higher the interest amount. In 30-year-long home loans, it can be more than twice the principal. Such a large interest may pose a huge psychological burden on the borrower as they need to maintain the continuous income flow for a long time to repay the equated monthly instalment (EMI) on time. However, there are ways through which they can not only decrease the interest amount but also cut down on loan tenure.
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(Disclaimer: This is not financial advice. Do your own due diligence or consult an advisor for financial planning.)
How to reduce interest amount
Some of the ways to reduce the interest amount are making a large down payment, paying an additional EMI every year, and making a prepayment(s). With these options, one can reduce the interest amount significantly.
How to reduce loan tenure
When one uses the option of prepayment, the lender gives them two options- either they can reduce their EMI amount, or they can keep the EMI amount the same and reduce tenure. If they reduce their EMI amount, the interest will decrease, but the loan tenure will remain the same. If they go for the same EMI, the interest amount and the loan tenure will both reduce.
How prepayment is made
Banks have a lock-in period for prepayment. In most cases, it is 3 years. After that, the borrower can either make a one-time prepayment or can make it in instalments.
When can one make prepayment?
The sooner one makes it after the lock-in period gets over, the more money they are likely to save.
What can be prepayment amount?
The prepayment amount can be the maximum allowed limit. A higher prepayment means more saving of interest.
Calculations for Rs 70 lakh home loan
We are taking 25 years as the duration for the home loan. The rate of interest will be 9.5 per cent.
What will be EMI?
The estimated EMI for the Rs 70 lakh loan will be Rs 61,159, the estimated interest will be Rs 1,13,47,630, and the estimated repayment amount will be Rs 1,83,47,630.
What will be prepayment amount?
The prepayment amount will be Rs 7 lakh (10 per cent of the principal amount).
When will be prepayment made?
It will be made after completing 3 years. E.g., if the home loan started in November 2024, the prepayment of Rs 7 lakh will be made in December 2027.
What will be impact if borrower opts for reduced EMI?
The estimated EMI will be reduced by Rs 6,338, from estimated Rs 61,159 to estimated Rs 54,820.
How much amount will be saved?
The estimated amount thus saved will be Rs 9,66,994.
What if borrower opts for same EMI?
If the borrower goes for the same EMI as before making the prepayment, they can repay the loan in 232 months (in less than 68 months, or 5 years and 8 months, than the original duration).
How much money can be saved?
The estimated interest saved will be Rs 35,10,091.