Planning for home loan prepayment but confused whether to reduce EMI or tenure? Then I will help you to understand why reducing tenure will give more benefit than reducing EMI. By the perception it seems like reduction of EMI will impact immediately in your financial life. But if you do a thorough analysis you can understand in the long run this is not actually profitable for you. Generally Home Loan EMIs deduct a huge interest in the first half of the entire loan tenure, so it is better to reduce the tenure to reach that half-way sooner.
Without wasting much time we will straight way explains this with an example. This example is done based on Home Loan Online calculators available in internet for education purpose only.
Let’s take our Sharmaji who took a home loan of Rs 10,00,000/- (10 lakh) for 20 years (240 months) with an interest rate of 10.00%. Right now the current home loan interest rate is around 10.25 to 10.75 range based on different banks. You can do an analysis on that for accurate data. So now the loan details are as below.
Tenure (Months) : 240
Interest Rate : 10.00%
Loan Amount : 1000000
EMI applicable : 9650
Now Sharmaji has decided to pay Rs 1,00,000 (1 lakh) to repay the home loan and get some relief from interest burden.
Scenario 1 : If Sharmaji choose To reduce the EMI
From these home loan data after 20 years the total repayment will be around Rs 23,16,052/- where you will pay around Rs 13,16,052/- as interest. Now if he doesn’t reduce the tenure, then his new EMI will be around Rs 8685/- after 1 lakh deduction. Now the calculations will be like below
Monthly gain = 9650 – 8685 = Rs 965/- (He can invest or spend this amount extra every month)
Total repayment after 20 years = Rs 20,84,447, where interest paid will be Rs 11,84,447/-
So he will save around Rs 13,16,052 – 11,84,447 = 1,31,605/- as interest.
Scenario 2 : If Sharmaji choose To reduce the Tenure
Now if Sharmaji fix the EMI as it is and decide to reduce the tenure, then it will be a different calculation and also he will like the result. Here the calculation is based on excel based Home Loan EMI calculators available online. Now the new data will be like below
EMI applicable : Rs 9650 (Not changed)
Part Payment : Rs 1,00,000/-
Tenure Reduced : 59 months (Approx calculation)
New Tenure : 181 months remaining
Interest rate : 10.00%
Loan Balance : Rs 900000 /-
Interest payable : 846353 (after tenure reduction)
Total amount payable:1746353 (after tenure reduction)
Now Total Interest saved = 13,16,052 – 846353 = Rs 4,69,699/-.
Final verdict ~ Reduce Emi vs Reduce Tenure/No of years
This may not be a 100% correct calculation, but to understand the home loan repayment dilemma this is enough. This calculation clearly shows how one can save huge amount by reducing home loan tenure while part-payment. Banks have their own calculator to calculate the exact figures. Whenever you visit a bank for home loan repayment you can ask for the actual figures based on your Home loan amount. They will provide you the amount with which you can clearly see that only by reducing the tenure only you can reduce a huge interest burden, which is really a smart step towards a good financial life.
But in case you are paying a 60-70% of your salary as home loan EMI then this article may not be helpful for you as you will be looking for an immediate relief on such a huge EMI.