When you take a home loan for a long tenure like 20, 25 or 30 years, it often happens that you end up paying more interest than the principal amount. In the initial years of the loan, a large part of your EMI goes towards interest and very little of the principal is deducted.
But if you follow a simple prepayment trick, a home loan of Rs 50 lakh taken for 25 years at 8.5% interest rate can be paid off in less than 20 years. Not only this, with this you can also save interest of around Rs 18.31 lakh. Let us understand how.
Breakup of home loan of Rs 50 lakh
- Loan amount: Rs 50 lakh
- Tenure: 25 years
- Interest Rate: 8.5%
- EMI: Rs 40,261
- Total interest: Rs 70.78 lakh
- Total payment: Around Rs 1.21 crore
- That is, you can see that the interest amount becomes more than the principal amount by about Rs 21 lakh.
How to save lakhs of rupees and many years
If you start paying an extra EMI every year (i.e. Rs 40,261 extra) from the second year of your home loan, then:
- Interest of around Rs 18.31 lakh can be saved
- The loan tenure can be reduced by around 5 years 5 months (65 months)
- For example:
- Loan taken: In January 2026
- First additional EMI given: One extra EMI every year from February 2027
- The condition is that the interest rate remains the same throughout.
Expert opinion on home loan prepayment
Prepayment is most beneficial in the initial years of the loan, because at that time a large part of the EMI goes towards interest. Prepayment from bonus, salary increment or tax refund is a good way.
Benefit of prepayment in fixed, repo linked and MCLR loans?
Prepayment is beneficial in all types of loans as it reduces the principal. Floating rate loans usually come with penalty-free prepayment, while fixed rate loans may have some charges, so be sure to check the terms first.
Is it necessary to inform the bank?
You can make prepayment through net banking, by visiting branch or by giving standing instruction. Keep in mind that the money should be used in reducing the principal and not in reducing the EMI.
What should be the right prepayment strategy?
First create an emergency fund of 6 months, take health and term insurance, continue with necessary investments and then make prepayment with the extra money left. The easiest way is to use bonuses, increments and tax refunds.