Ways of Repaying a Home Loan Early and Saving Interest

Everybody aspires to buy their dream home at some stage in life. But, for most people, a dream home purchase with their own money is not possible due to the huge amount involved. Hence, most people have to resort to taking a home loan.

How to Repay Home Loan Faster ? – An Important Financial Goal

As discussed earlier, a 20-year home loan repayment is a big commitment. Hence, you should include early repayment in your list of financial goals as an important one. Early repayment requires a systematic approach, discipline, and motivation to stay the course till the goal is achieved. An investment expert can help you design an early repayment plan, implement it, review it regularly, till the goal is achieved. Hence, you should work with an investment expert to achieve your goal of home loan early repayment along with other financial goals.

4  Smart Home Loan Repayment Methods

There are various ways in which you can repay the home loan earlier than scheduled. Let us understand it with an example. On 1st April 2024, Kanchan took a Rs. 40 lakh home loan for a tenure of 20 years at 9.00% p.a. (floating interest rate). Her monthly EMI is Rs. 35,989. The total interest outgo for 20 years will be Rs. 46,37,369, and the total repayment with the principal will be Rs. 86,37,369.

Let us see how Kanchan can use some ways of repaying the home loan before its scheduled tenure and save interest.

Here Are Few Home Loan Repayment Tips -

5% or 10% Increase in Annual EMI

Kanchan can ask the bank to increase her monthly EMI by 5% every year. Her EMI will look at follows: 1st year EMI – Rs. 35,989, 2nd year EMI – Rs. 37,788, 3rd year EMI – Rs. 39,678, 4th year EMI – Rs. 41,662, and so on. With an annual increase in income, a 5% annual increase in EMI should be manageable for most individuals.

The benefit of a 5% increase in annual EMI
Kanchan can finish her loan in 145 monthly instalments instead of the scheduled 240 months. The loan will get over in 12 years instead of 20 years, resulting in savings of 95 EMIs.

Her total interest outgo will be Rs. 29,22,818 instead of the earlier Rs. 46,37,369. Thus, it will result in interest savings of Rs. 17.15 lakhs.

Similarly, Kanchan can ask the bank to increase the EMI by 10% annually. You can see the benefits of a 10% EMI increase in the table below. 
After some years, you may feel managing a 10% increase in annual EMI is difficult. At that stage, you can go for either a 5% annual EMI increase or a fixed amount prepayment (for example, Rs. 50,000) every year, depending on your overall financial situation.

Rs. 50,000 Annual Prepayment

The second option that Kanchan can consider is a Rs. 50,000 annual home loan prepayment at the end of every year. The option is useful for people who get an annual bonus in lumpsum based on their performance. Her prepayment schedule will look as follows: 1st April 2025 – 1st Rs. 50,000 prepayment, 1st April 2026 – 2nd Rs. 50,000 prepayment, 1st April 2027 – 3rd Rs. 50,000 prepayment, 1st April 2028 – 4th Rs. 50,000 prepayment, and so on.

Benefits of Rs. 50,000 Annual Home Loan Prepayment

Kanchan can finish her loan in 187 monthly instalments instead of the scheduled 240 months. The loan will get over in 15.58 years instead of 20 years, resulting in savings of 53 EMIs. 

Her total interest outgo will be Rs. 34,55,162 instead of the earlier Rs. 46,37,369. Thus, it will result in interest savings of Rs. 11.82 lakhs.

Combination of a 5% Increase in Annual EMI and Rs. 50,000 Prepayment

The third option that Kanchan can consider is going for a combination of Rs. 50,000 prepayment at the end of every year, and a 5% increase in annual EMI at the start of every year.

The Benefit of a Combination of a 5% Increase in Annual EMI and Rs. 50,000 Prepayment

Kanchan can finish her loan in 131 monthly installments instead of the scheduled 240 months. The loan will get over in 10.91 years instead of 20 years, resulting in savings of 109 EMIs.

Her total interest outgo will be Rs. 25,37,664 instead of the earlier Rs. 46,37,369. Thus, it will result in interest savings of Rs. 21 lakhs.

Important note

In all the above scenarios we have considered in the article, we have assumed the interest rate to be constant at 9% p.a. for ease of calculations. However, in real life, the interest rate will keep changing for a floating-rate home loan. As the interest rate changes, all calculations will change.

Other Home Loan Prepayment Options

Apart from the three options that we have discussed in this article, Kanchan can consider other options. Some of these include:

1. Paying one additional EMI every year,
2. Rs. 1 lakh prepayment every year,
3. A combination of a 5% increase in annual EMI with one additional EMI every year,
4. A combination of a 5% increase in annual EMI with Rs. 1 lakh prepayment every year, etc. 

It all depends on your cashflows, annual salary increments, savings, and your overall financial position.

Let us now summarise the various options that we have discussed.

The above table shows how many EMIs and how much interest amount will be saved depending on the home loan prepayment option chosen. The maximum saving comes when the EMI is increased by 10% p.a. However, you may select the option you are comfortable to start with. As you progress ahead, you can always try other prepayment options that can give you higher savings.

Factors to Consider When Making a Home Loan Prepayment

When making a home loan prepayment, you should consider the following factors:

1.  In the initial years, the interest component of the EMI is much higher than the principal component. Hence, you should go for prepayment in the earlier years to derive maximum benefit.
2.  You should not use the money kept in your emergency fund or money meant for financial goals, for making home loan prepayment
3.  If you are filing returns under the old tax regime, consider the tax benefits on principal repayment (Section 80C) and interest (Section 24) while choosing the prepayment option.
4. If you have taken a 20-year home loan beyond the age of 40 years, the repayment will spill over into your retirement years. It is better to make gradual prepayments and try to finish the repayment before retirement. 
5. Consider your overall cash flows before choosing the prepayment option. It should not happen that the prepayment amount puts a strain on your overall financial position and stresses you out.

Make Home Loan Prepayment a Part of Your Financial Planning

If you want to prepay your home loan and finish it ahead of schedule, add it as a financial goal to your financial planning journey. You can consult an investment expert and work out a repayment plan that will work best for you based on your current financial situation. With a dedicated approach, timely commitment and financial focus, you can achieve the home loan repayment ahead of schedule and become debt-free from it.