Reduce Home Loan EMI vs Reduce Tenure: For Rs 60 lakh, 25-year loan; which option can save Rs 28 lakh in interest and 5 years and 4 months in duration?
Home Loan Calculations: When a borrower makes a prepayment for the home loan, the lender gives them the option to either reduce the EMI or keeping it the same. Borrowers can take a call based on their financial situation and financial goals.
Home Loan Prepayment: Prepayment is an effective way to reduce your loan amount. One can use it after completing the mandatory lock-in period. Prepayment can be made in one go or in instalments. When you make a prepayment, the lender gives you 2 options- either you can reduce your equated monthly instalment (EMI) or you can opt for the same EMI. Both options will benefit you in one way or another. Know more about prepayment of a home loan and which option—reducing the EMI or keeping it the same- can help one save a higher amount on a Rs 60 lakh, 25-year home loan.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
When can you make a prepayment?
You can make a prepayment any time after completing the lock-in period. This period may vary from lender to lender or loan to loan. You can check your loan documents to know the prepayment conditions. Generally, the lock-in period is between 1 to 3 years.
Do lenders ask to pay charges for loan prepayment?
Banks charge prepayment charges mainly on fixed interest home loans. The penalty is usually 2 per cent of the amount being prepaid through refinance. However, if one uses their own funds to prepay their loan, there is most likely no prepayment penalty.
What's the right time to make prepayment?
In the initial stage of the home loan, the interest component is quite a bit higher than the principal component. So, the early prepayment can help the borrower save a lot of money and time. Since the interest part reduces later, making a prepayment in the mid or later stage of the loan may not be that beneficial.
Prepayment source
A borrower can think of making a prepayment if they get a lump sum amount as a salary bonus, return from investment, share from property, etc.
Reduce EMI or shorten tenure?
After you make a prepayment and opt for a reduced EMI, your loan tenure will remain the same, but your interest amount will be cut.
Reduce EMI or shorten tenure?
If you opt for keeping the EMI the same as before making the prepayment, your interest amount and the loan duration will be cut.
Home loan conditions
For our story, we are taking the example of Rs 60 lakh, 25-year home loan, where the interest rate is 9.5 per cent.
What will be EMI for this loan?
The estimated EMI for the loan will be Rs 52,421.8.
What will be interest and repayment?
The estimated interest amount for such a loan will be Rs 97,26,539.9, and the estimated repayment will be Rs 1,57,26,539.9.
How much will be repayment?
We will take the example of a 10 per cent prepayment amount of the principal. So, if the loan principal amount is Rs 60,00,000, the prepayment will be Rs 6,00,000. But we won't make prepayment in one go. It will be made in 3 instalments of Rs 2,00,000 each.
When will prepayment be made?
The first prepayment instalment will be made after a 3-year lock-in period. So, if the home loan is starting today, the 1st prepayment instalment will be made in January 2028, the second in January 2029, and the third in January 2030. After that, there are 2 options- either you can opt for a reduced EMI or the same EMI.
What if one reduces EMI?
If one opts for a reduced EMI, it will be down from an estimated 52,422 to Rs 46,914, a decrease of Rs 5,508. In such a case, the estimated saved amount on the loan will be Rs 7,87,365.
What if one keeps same EMI?
If one opts for the same EMI, they will save an estimated Rs 27,81,026.
What will be new loan tenure?
In such a case, their new loan tenure will reduce from 300 months (25 years) to 236 months (19 years and 8 months), a decrease of 64 months (5 years and 4 months).