You pay hefty amount on the interest of a home loan. In most of the cases, interest rate exceeds principal amount. But with prepaying just one extra EMI every year, or 5 per cent extra amount in prepayment, you can save huge money and reduce many years in the home loan duration. Know the calculation.
Home Loan Calculator: Home loans are high amount and are taken for long duration. It is common for home loan borrowers to repay a higher interest rate than the principal amount in those repayment years. E.g. For a home loan of Rs 50 lakh taken for 20 years at an interest rate of 8 per cent a year, the borrower pays Rs 50,37,281 in interest. For a nine per cent interest rate loan of the same principal, the interest goes up to Rs 57,96,711, and the total repayment becomes Rs 10,796,711.
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It shows the repayment can be more if the interest rate is high and the duration is longer.
But if you prepay an extra EMI every year starting from the second year of your loan, your 20-year loan can be repaid in just 12 years.
Similarly, if you target to pay 5 per cent extra reducing balance prepayment annually, you can repay your 20-year loan in less than 12 years.
This significant change happens because the prepayment gets adjusted to your principal amount of the loan, hence, the interest you pay reduces considerably, as well as helping you repay loan sooner.
Know the calculation, how it is possible.
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How you can repay a 20-year loan in 12 years.
One extra EMI a year
In the first scenario, your home loan is Rs 50 lakh at an interest rate of nine per cent for 20 years.
In this case, your monthly EMI will be Rs 44,986 and in a year, you will repay Rs 539,832 in a year.
If you start paying one extra EMI every year, which means a total of Rs 584,818 a year, starting with the 13th, 25th, 37th months, and so on, you will repay the loan in just 12 years.
If you start repaying one extra EMI every year from the 1st installment itself, which means from the 1st,13th, 25th, 37th, and so on, your loan will be repaid in less than 12 years.
5% extra repayment every year
In the second scenario, with all the loan conditions the same as in the first scenario, and you prepay 5 per cent extra amount every year, you will prepay your entire loan in less than 12 years.
While it saves you 97 months of EMIs, it also saves approximately Rs 28 lakh on the overall prepayment.
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Home Loan Calculation:
| Method | Loan | Months To Pay | Prepay | Rate | Interest | EMI | Total Repayment | Interest Savings |
| Home Loan Now With No Pre-Pay | ₹ 50,00,000 | 240 | ₹ 0 | 9% | ₹ 57,96,711 | ₹ 44,986 | ₹ 1,07,96,711 | Months Saved |
| 5% Reducing Balance Pre-Pay Annually | ₹ 50,00,000 | 143 | ₹ 15,54,140 | 9% | ₹ 29,77,739 | ₹ 44,986 | ₹ 79,77,739 | Value of EMIs Saved |
| Savings | – | 97 | – | ₹ 28,18,973 | – |
Data Courtesy: BankBazaar.com
What you can do with money saved?
If you are saving Rs 38 lakh on repayment, you can invest that money in a scheme where high returns are expected.
Suppose, you are investing that money in a mutual fund through monthly SIP for 12 years, where you get returns at 12 per cent, your monthly investment will be approximately Rs 26,388, your wealth gain will be over Rs 47 lakh, and the expected amount that you will get after 12 years will be over Rs 85 lakh.
How can you manage prepaying extra money?
When you apply for a loan, a lender checks your credit score, monthly earning, and repayment capacity to decide the interest rate.
The tenure is generally decided on the basis of your retirement age, which is set at 60 years and counted at the age when you take the loan.
When you begin repaying loan, you may find it difficult to repay an EMI as it is high, but your earning may increase in the future and you can adjust that extra earning to repay your EMIs.
Here, we tell you a few ways how you can manage paying an extra EMI or 5 per cent prepayment every year.
Extra earnings
When you get promotion and change your job, there are high chances that your salary will increase. You can use that extra salary to adjust to the prepayment every year.
Bonuses
In every office, there is a provision of some kind of bonus given to employees every year.
This bonus can be a part of your salary, festival bonus, or some incentive in return of your high performance.
You can use that bonus to repay the extra EMI.
Refinance
If your credit score improves in the future, you can always think of refinancing your loan from the same bank at a lower interest rate.
That will reduce your EMI.
But here, we suggest you to increase your EMI so that you can prepay your loan early and save more money than before on repayment.
Home loans help you fullfil your dream of owning a home.
But you also play a hefty amount in interest rate. You should always think of ways to reduce interest amount to a large extant and prepay your loan earlier than its actual duration.
Paying one extra EMI every year or increasing your repayment amount to 5 per cent a year can help you prepay a 20-year loan in 12 years or less than that period.
Use extra earning, bonuses and refinancing to save your money and time on your home loan.
(Disclaimer: These are expert calculations. But do your own research or consult your advisor for home loan calculations.)
