Rs 71,473 EMI vs Rs 64,109 EMI: Which prepayment option may help you save Rs 58 lakh, 8 years on Rs 85 lakh, 30-year loan?
Reduce EMI vs Reduce Tenure: When a home borrower prepays their home loan, they get the option to either reduce their tenure or their equated monthly instalment (EMI), but which option may help you save a higher amount on a Rs 85 lakh home loan.
Home Loan Prepayment: Home loan borrowers who want to pay off their home loan before its scheduled tenure go for the prepayment option. They prepay their loan in instalments or one time. Once they prepay, the lender gives them the option to either choose the same EMI or a reduced EMI. In either case, they save interest, but one option helps them save a higher amount. Know which is that, and which of the two can help them save Rs 57 lakh in interest and nearly 8 years in tenure on a Rs 85 lakh, 30-year loan.
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(Disclaimer: This is investment advice. Do your own due diligence or consult an expert for financial planning.)
What is prepayment?
A prepayment is an out-of-turn amount that a home loan borrower pays other than scheduled EMIs. Prepayment can be one time or in instalment.
When can one make prepayment?
One can make a prepayment after the lock-in period. It may be 1-3 years. But a bank imposes a penalty when one prepays their loan. The borrower needs to check penalty charges before opting for a prepayment. However, if the home loan is at a floating rate, the bank can't charge a prepayment penalty.
What are penalty charges?
It's not fixed. Banks may charge anywhere between 0.5 per cent to 3 per cent of the outstanding amount.
What are minimum, maximum prepayment limits?
The minimum prepayment can be an amount equal to a few EMIs, while there is no maximum limit.
How does prepayment help?
Once a borrower makes a prepayment, the lender gives them two options- either they can reduce their EMI amount or they can choose the same EMI.
How do both functions work?
If one goes for a reduced EMI, their loan interest amount will reduce, but the tenure will remain the same.
But if they opt for the same EMI, their interest amount and tenure will reduce.
Home loan calculations
We will calculate the home loan of Rs 85 lakh for 30 years at a 9.5 per cent interest rate.
What will be EMI and interest?
The estimated EMI will be Rs 71,473, the estimated interest will be Rs 1,72,30,139, and the estimated repayment will be Rs 2,57,30,139.
Prepayment calculations
We will make a prepayment that will be equal to 10 per cent of the home loan principal. So, for an Rs 85 lakh home loan, the total prepayment amount will be Rs 8.5 lakh.
When will we make prepayment?
We will not make a single prepayment. We will make 3 prepayments of Rs 2,83,333.33 each. For a loan started in January 2025, the first prepayment will be in February 2028, the second will be in February 2029, and the third will be in February 2030. We will show what what will be the impact if one goes for the same EMI or a reduced EMI.
Amount saved if one goes for reduced EMI
The estimated EMI will reduce from Rs 71,473 to Rs 64,109, a decrease of Rs 7,363.
How much amount will be saved?
The estimated amount saved will be Rs 14,42,010.
Amount saved if one goes for same EMI
If the borrower keeps the EMI the same, the estimated amount saved will be Rs 58,72,804.
How much time will be saved?
The estimated time saved in repayment will be 94 months. It means the 30-year loan can be repaid in 22 years and 2 months.