Reduce Home Loan EMI vs Reduce Tenure: Which prepayment option can help save Rs 27 lakh, & 6 years and 3 months on Rs 50 lakh, 25-year loan
Reducing your home loan EMI means lowering the monthly installment amount you pay towards your loan repayment. On the other hand, reducing the loan tenure means maintaining the same EMI and cutting the interest cost. Plus reducing your tenure leads to quicker loan closure, allowing you to be debt-free soon. But the question that often confuses people who opt for home loan prepayment is whether they should go for a reduced home loan EMI or a reduced tenure.
Home loan prepayment is a method of paying off a home loan in part or in full before the end of the loan's term. Prepayment can help you save money on interest, reduce your loan tenure, and improve your credit score. Therefore, let’s understand the difference between reducing home loan EMI vs reducing home loan tenure through calculations and which prepayment option can help you save Rs 27 lakh, & 6 years, and 3 months on Rs 50 lakh, 25-year loan.
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(Disclaimer: Our calculations are projections and not investment advice. Do your due diligence or consult an expert for financial planning)
What is prepayment option?
A prepayment option is a way to pay off a debt, like a loan or mortgage, before the scheduled end date. It can be done in full or in part and can be made by making a lump sum payment or additional payments on top of regular installments.
When can borrowers use prepayment option?
The prepayment option depends on the type of loan and the lender's policy. However, many banks have a lock-in period of 1–3 years, during which prepayment is not allowed.
How prepayment option can be done?
Prepayment can be done in two ways, partial or full. In partial prepayment, a specific amount of the outstanding loan is paid before the scheduled loan closure date, while in full prepayment, the entire outstanding loan amount is paid off before the loan closure date.
What happens after prepayment is made?
After one makes a prepayment, the lender gives them two options, either the borrower can reduce their loan EMI amount, or they can opt for reduced loan tenure.
What are the benefits of prepayment?
The principal balance of the loan is reduced, which can lead to lower interest payments.
The loan's term may be shortened, which can lead to lower interest costs.
The monthly installments (EMIs) may be reduced.
Home loan calculations for Rs 50 lakh
We will show calculations on a Rs 50 lakh home loan at a 9.5 per cent interest rate for 25 years.
What will be home loan EMI?
The estimated EMI for the Rs 50 lakh loan will be Rs 43,685.
What will be interest and repayment?
The estimated interest will be Rs 81,05,450, and the estimated repayment will be Rs 1,31,05,450.
What will be prepayment amount?
The prepayment amount will be 12 per cent of the principal amount. It means for a 50 lakh loan, the prepayment will be Rs 6,00,000. But we won’t prepay it in one go. We will prepay it in 3 equal installments of Rs 2,00,000 each.
When prepayments need to be made
For a loan started in February 2025, the prepayment of the loan will start in February 2028 (after the completion of 3 years of the lock-in period). The next prepayment will be made in February 2029, and the third in February 2030.
How will it impact home loans?
After all 3 prepayments are made, you will have your revised home loan amount.
What is the next step after prepayment?
After making the prepayments one has to decide whether to opt for a reduced loan tenure or a reduced EMI.
What if you choose reduced EMI?
If you choose to reduce your EMI after prepayment, your revised estimated EMI will be Rs 38,197. It means you will save an estimated Rs 5,488 every month for the rest of your loan tenure. One can save Rs 7,97,294 interest on the loan.
What if you choose reduced tenure?
If you opt for the same EMI as it was before the prepayment (Rs 43,685), you will save the interest amount as well and your loan tenure will be also shortened. Your revised estimated time duration to repay the loan will be 18 years and 9 months, which is 6 years and 3 months short of the scheduled time.
What will be your revised interest amount?
After choosing the option of the same EMI, you will save an estimated interest amount of Rs 26,89,744.