Reduce Home Loan EMI vs Reduce Tenure: Which prepayment option can help save Rs 55 lakh, & 7 years and 9 months on Rs 80 lakh, 30-year loan
Reduce EMI vs Reduce Home Loan Tenure: When a home loan borrower makes a prepayment, they can either pick to reduce their EMI amount or the tenure. But which option can help them save the maximum amount on their interest?
Reduce EMI vs Reduce Home Loan Tenure: The interest amount is quite a major concern when repaying a home loan. Since the loan tenure is generally 15-30 years, the interest amount is more often higher than the principal amount. However, they can save a significant amount on interest and time on loan tenure through prepayment. Once they exercise the prepayment options, borrowers can reduce their EMI amount and save interest, or borrowers can keep the same EMI as before and save a substantial interest amount and shorten the tenure. But which of the two options can save a higher amount in interest? Which option can help save a borrower over Rs 55 lakh on an Rs 80 lakh loan for 30 years? Know these answers in this write-up-
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Why is interest amount often higher than principal in home loan?
The longer the loan tenure, the higher the interest amount. Since home loans are for long durations, the interest amount in most cases is higher than the principal. Let's see a couple of examples of how a borrower can pay lower and higher interest amounts than the principal on the same amount and different tenure loans.
Interest on Rs 60 lakh home loan for 15 years
If a borrower takes a Rs 60 lakh home loan at a 9.5 per cent interest rate for 15 years, the estimated EMI will be Rs 62,653, the estimated interest will be Rs 52,77,627, and estimated capital gains will be Rs 1,12,77,627.
Interest on Rs 60 lakh home loan for 20 years
If the same person takes the Rs 60 lakh loan at a 9.5 per cent interest rate for 20 years, the estimated EMI will be Rs 55,928, the estimated interest will be Rs 74,22,689, and estimated capital gains will be Rs 1,34,22,689.
Interest on Rs 60 lakh home loan for 25 years
But, if one takes a Rs 60 lakh home loan at a 9.5 per cent interest rate for 25 years, their estimated EMI will be Rs 52,422, the estimated interest will be Rs 97,26,540, and the estimated repayment amount will be Rs 1,57,26,540.
Conclusion
It shows how a loan tenure can increase the interest amount significantly. In a 15-year loan, it was Rs 52,77,627, in 20 years, in increased to Rs 74,22,689, and in 25 years, it jumps to Rs 97,26,540.
Calculations for Rs 80 lakh loan
We will take the example of an Rs 80 lakh home loan at a 9.5 per cent interest rate for 30 years.
What will be home loan EMI?
The estimated EMI for the Rs 80 lakh loan will be Rs 67,268.
What will be interest and repayment?
The estimated interest will be Rs 1,62,16,601, and the estimated repayment will be Rs 2,42,16,601.
What will be prepayment amount?
We will take the prepayment amount of Rs 8 lakh, 10 per cent of the loan's principal amount.
When do we need to make prepayment?
We will make a prepayment in 3 instalments of Rs 2,66,667 each. For a loan started in January 2025, the first prepayment will be made in February 2028, the second in February 2029, and the third in February 2030.
What will happen after prepayment?
The borrower can either keep the same EMI as before, or they can pick a reduced EMI.
What if they choose lower EMI?
In that case, their estimated EMI will be reduced to Rs 60,336 from Rs 67,268, a decrease of Rs 6,932.
By doing that, the estimated saving on interest will be Rs 13,55,431.
What if they choose same EMI?
In this way, they can save an estimated amount of Rs 55,16,672.
How much time will they save?
They can pay off a 30-year (360-month) home loan in 267 months, a decrease of 93 months, or a 7-year and 9-month period.