Reduce EMI or Home Loan Tenure: Which option can save Rs 39 lakh in interest and 66 months in tenure on Rs 80 lakh, 25-year home loan? Know here
Reduce EMI or Home Loan Tenure: When we make a prepayment of a home loan, the lender asks for two choices: either we can choose to reduce the loan EMI or tenure. We can find ourselves in a dilemma with such a set of choices. Then what are the elements that can help you choose the right option?
Reduce EMI or Home Loan Tenure: When we take a home loan from a lender, we pay a higher interest amount than the principal if the loan duration is long such as 20 years and over. The longer the home loan tenure is, the higher the interest amount will be. One of the effective ways to reduce the interest amount is prepayment. If prepayment is done early during the home loan tenure, the interest amount can decrease significantly, lightening the burden of the home loan on the borrower.
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(Disclaimer: This is not loan advice. Do your own due diligence or consult an expert for financial planning.)
When can borrower use prepayment option?
Banks have a lock-in period before which, the prepayment option can't be used. In most cases, it is 3 years.
How prepayment option can be used
One can prepay a lump sum amount, or they can prepay more than one instalment. Making a single prepayment will decrease the interest amount more compared to when you allocate the same prepayment amount in more than 1 instalment and pay it in separate years.
What happens after prepayment is made?
After one makes a prepayment, the lender gives them two options- either the borrower can reduce their loan equated monthly instalment (EMI) amount, or they can opt for reducing their loan tenure.
How can one decide?
It depends on an individual's financial goals. If their income has decreased or if they have more liabilities and can't afford the same EMI, they may opt for a reduced EMI amount option. Or else, they can continue their existing EMI amount.
Maths for Rs 80 lakh, 25-year loan
Here, we will show calculations for Rs 80 lakh home loan for 25 years, where the interest rate will be 9.5 per cent.
What will be EMI and interest amount?
The estimated EMI will be Rs 69,896, estimated interest will be Rs 1,29,68,720, and the estimated repayment will be Rs 2,09,68,720.
What will be prepayment amount?
The prepayment amount will be 10 per cent of the principal. It will be made in 3 instalments of Rs 2,66,666.66 each. So, the total amount in 3 years will be Rs 8,00,000.
When prepayments need to be made
The prepayments will be made upon completion of the 3rd, 4th, and 5th years of the loan. For a loan started in November 2024, the first prepayment instalment will be Rs 2,66,666 in December 2027, the second instalment will be in January 2028, and the third will be in February 2029.
What if one chooses reduced EMI?
The estimated EMI will be reduced from Rs 69,896 to Rs 62,608, a reduction of Rs 7,288. The duration will remain the same, but the estimated interest will be cut by Rs 10,79,896.
What if one picks reduced tenure?
If one keeps the EMI amount the same as Rs 69,896, the estimated interest cut will be Rs 38,71,335, and the estimated tenure will be reduced from 300 months to 234 months, a decrease of 66 months.