Home Loan Interest Saving: How one can save Rs 37 lakh and 5 years, 4 months on Rs 80 lakh, 25-year loan through prepayment
Home Loan Calculations: A home loan prepayment can be an effective tool to reduce the interest amount or loan tenure, or both. The earlier one makes it, the higher interest they can save. Even a modest prepayment can shave off lakhs of rupees from an Rs 80 lakh home loan.
Home Loan Calculations: Home loans taken for long durations force a borrower to pay quite a higher amount than principal. In contrast, they pay a lower interest amount when they take it for a short duration. Initially, borrowers may find it difficult to repay the equated monthly instalment (EMI) of the home loan. But as their income increases or they get a lump amount from somewhere, they may use it to prepay the loan. Even a modest amount in the form of prepayment can reduce the interest amount or tenure or both significantly.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
How home loan interest amount increases with loan tenure
If a person takes a Rs 55 home loan for 20, 25, or 30 years at a 9.5 per cent interest rate. This is how much estimated interest they need to pay in each case.
In 20 years, the estimated EMI will be Rs 51,267, the estimated interest will be Rs 68,04,132, and the estimated repayment amount will be Rs 1,23,04,132.
How home loan interest amount increases with loan tenure
In 25 years, the estimated EMI will be Rs 48,023, the estimated interest will be Rs 89,15,995, and the estimated repayment will be Rs 1,44,15,995.
In 30 years, the estimated EMI will be Rs 46,247, the estimated interest will be Rs 1,11,48,913, and the estimated repayment will be Rs 1,66,48,913.
What are the ways to reduce interest amount or tenure?
One can opt for part prepayment or a full prepayment. They can also pay one additional EMI every year to reduce the interest amount, tenure, or both.
Is there any lock-in period in prepayment?
Banks can have a 1-3 year lock-in period for prepayment.
Home loan calculations
We will take the example of an Rs 80 lakh home loan. The interest rate will be 9.5 per cent, and the tenure will be 25 years.
What will be EMI?
The estimated EMI on such a loan will be Rs 69,896.
What will be interest and repayment?
The estimated interest will be Rs 1,29,68,720, and the estimated repayment will be Rs 2,09,68,720.
Prepayment calculations
We will show the example of 10 per cent prepayment of the principal amount. Since the loan amount is Rs 80,00,000, the prepayment amount will be Rs 8,00,000. But we will make this prepayment in 3 instalments of Rs 2,66,666 each.
When will we make prepayments?
For a loan taken in December 2024, the first prepayment will be made in January 2028, the second in January 2029, and the 3rd in January 2030.
What options will home loan borrower have after making prepayment?
They can either opt for the same EMI or for a lower EMI. If they go for a lower EMI, the loan tenure will remain the same, but they will save on interest. If they opt for the same EMI, the interest amount and the tenure will both reduce.
What if one goes for a lower EMI?
The estimated EMI will be cut from Rs 69,896 to Rs 62,542, a cut of Rs 7,353, and the estimated interest saved will be Rs 10,44,799.
What if one goes for same EMI?
In that case, the estimated interest saved will be Rs 36,80,273, and the estimated tenure saved will be 64 months.