- Date : 23/06/2022
- Read: 4 mins
Many people end up repaying their home loan over most of their working career, and some till retirement or even beyond. However, if you take proactive steps for prepayment, you can repay your home loan well before retirement.
Many people go about their regular home loan EMI repayment till the usual tenure of 20 or 25 years is over. They don’t think about prepaying the loan and finishing the home loan earlier as they may not know the benefits of doing so. In the process, they end up paying a huge amount by way of interest, which can be equal to the principal amount (or even higher) over the entire loan tenure.
This article focuses on some home loan repayment options that can help you repay your home loan much earlier than scheduled and save a huge amount of interest cost in the process.
Home loan repayment options
Here’s an example to understand the home loan repayment options. Let us assume Vinita has taken a home loan of Rs 50 lakh for a tenure of 20 years at an 8% interest rate. Her monthly EMI amount is Rs 40,280. Over 20 years, she will be paying interest to the tune of Rs 46,67,118. Vinita is claiming tax benefits on the principal amount under Section 80C and on the interest amount under Section 24 of the Income Tax Act.
Let us look at some of the prepayment options that Vinita can consider:
1) Paying an extra EMI every year
Vinita can consider paying an extra EMI of Rs 40,280 at the end of every year. If she does this, the home loan will be over in 200 months (16.67 years) instead of the scheduled tenure of 240 months (20 years). The overall interest amount will also get reduced to Rs 37,73,498 instead of Rs 46,67,118, resulting in an interest saving of Rs 8.93 lakh.
If cash flows permit, Vinita can also consider paying more than one extra EMI every year. It will help her repay the home loan much earlier than scheduled.
2) Increasing the EMI by 5% every year
Vinita can also consider increasing the EMI by 5% every year. In this case, the first year’s EMI will be Rs 40,280, the second year’s EMI will increase to Rs 42,294, the third year’s EMI will increase to Rs 44,408, and so on. With a 5% increase in annual EMI, the home loan outstanding principal will get over in 162 months (13.5 years) instead of 240 months (20 years). The overall interest amount will get reduced to Rs 30,71,123 instead of Rs 46,67,118, resulting in an interest saving of Rs 15.95 lakh.
She can also consider increasing the home loan EMI by 7.5% or 10% every year rather than 5% if cash flows permit. It will help her repay the home loan much earlier than scheduled.
3) Combination of paying an extra EMI and increasing the EMI by 5% every year
Vinita also has the option of using a combination of paying an extra EMI every year and increasing the EMI by 5% every year. If she does that, the home loan balance will get over in 150 months (12.5 years) instead of 240 months (20 years). The overall interest amount will get reduced to Rs 27,47,728 instead of Rs 46,67,118, resulting in an interest saving of Rs 19.19 lakh.
Early home loan repayment can give peace of mind
We have just described various home loan repayment options. An individual can make an extra EMI payment every year, increase the EMI amount by 5% every year, or go for a combination of the two. Whichever option you choose, based on your financial situation, you will be able to repay the home loan before the schedule and become debt free. You will also save on the overall interest amount. Early repayment or timely repayment of loans results in peace of mind, which is invaluable. So, which repayment option are you choosing?