Home Loan Prepayment – Should I reduce EMI or Tenure?

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.

prepayment of home loan reduce emi or tenure

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.

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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/-.

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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.

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  1. Santanu Sir, I am Kousik from Kolkata. I had taken loan for Rs. 7 lakh repayment tenure of 20 years. Now I have outstanding balance of Rs. 6,75,000/ with 220 months remain as tenure. Now I wish to pay of Rs. 2 lakh, and planning to repay the whole loan within next 2 years. In that scenario please advise whether I should reduce EMI or Tennure. Because I don’t want to keep my debts for long.

  2. Good article. But what if Sharmaji invest 965 rs in SIP for remaining years? Will that be smart investment?

  3. Reduce EMI or Reduce Tenure – This is quite difficult choice but at careful thinking it will be better to reduce the EMI as you will get that much more cash in hand which can be used for other purpose. In any case bank will charge

    you the same amount of interest each month whether you reduce EMI or Tenure because interest calculation is always fixed and NO bank will cause loss of its own due to this. It will only affect the Principal Amount component of your EMI if you wish to reduce the tenure. Reducing the EMI after prepayment and bring total loan amount under control ( 10 years is always bad as you end up paying almost double the value of your original purchase. Always remember Homeloan is a Liability and not Asset till you clear it or come near to clear it. So my advice will be to pay more in first 5-8 years to bring your homeloan under 10L and then pay only 2L per year to get IT benefit of Principal (Section 80C) and Interest (Sec. 24) for next 5 years.

    Adv. Sachin Godambe
    (Social Activist, Pune)

  4. Hi… I was in bit confusion whether to reduce EMI amount / Tenure. Thank for explaining very nicely.

  5. i have a doubt if i reduce tenure instead of emi . the reduced tenure benefit i will get at the end of loan period and what if meanwhile interest rate rises also in another scenario i reduce tenure for now and i get 24 emi lower ( which is at the end of total tenure ) eg. 20 yr to 18 yr and in future i repay total loan in 15 yrs then will it actually help me because i m paying my loan befor 18 yrs . will i get actual benefit?

  6. Did you consider another scenario when you opt for EMI reduction but whatever EMI is saved per month is accumulated for, lets say 3 months, and made partial prepayment again?
    So rather than paying higher EMI that has principal and interest portion, save EMI to pay off principal amount. E.g. If I save 10k per month on EMI I collect 30K and make prepayment of 30K each quarter.

  7. Dear santanu,

    very much impressed to see your comments. i need one help. could you please send me soft copy of amortization schedule wherein in option of prepayment, reduction in tenure / EMI etc can be calculated. this i need to show amount of saving after reducing tenure. thanks in advance

  8. HI, I had taken phone on EMI for 12 months,
    I want to get done with the payment in 3-4 months.
    how can i change this emi

  9. I have a home loan of 32 Lacs, balance tenure 12 years. I intend to pre-pay around 22 lac. After making this prepayment, I intend to clear the balance principal amount in 2-3 years. In such case, is it advisable to reduce the EMI or the tenure?

  10. Nice article Santanu. In scenario #2, can you please explain how did you arrive at the 59 months reduction in tenure? I am taking to a particular bank for processing my home loan. The person i am talking to said that The tenure will be reduced only by the number of EMIs that the prepayment covers. For example if i prepay an amount which is equal to 10 months of my EMI, he said that the tenure will be reduced only by 10 months. Based on what he said, I do not see any benefit in prepaying. Please can you clarify how you arrived at the reduction of tenure? Is is posssible to contact you by email? Your help would be much appreciated.

    1. No, this is wrong. Whatever amount you will pre-pay it will reduce the principle and then making the EMI fixed the tenure will be recalculated. I have done this 4-5 times and now almost close to complete my Home Loan I took 5 years back.

  11. excellent article and to the point boss!! thanx.
    can you advise on one more sencrio – if the prson extent the tenure and the saving on emi will be paid at the end of the year as lumpsum to reduce the principal, then how it will effect the benifit?

    1. I don’t think it will be beneficial much. As the amount of interest you are paying in home loan can’t be touched via any kind of savings.

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  13. Thanks for your valuable advice.
    Can you please tell me that if there is any software which will calculate using both options ie calculating using EMI reducing option and Tenure reducing option.
    Thanks in advance

    1. Hi Rocky, I am not aware about that. But I think you can search for home loan emi calculator with changing data facility. But I don’t think they will provide you accurate data. Better to ask your bank only.

  14. Hi Sir,

    My dad took a home (5 lakh) for 15 years completed almost 10 years of payment everymonth EMI i.e., 5250, But bank people are telling that an EMI amount will high coming days. on what circumstances will it happen because we opted for Fixed home loan, Please clairify

  15. Hi, I have a loan outstanding of 70 lakhs. Borrowed as on 1st Jan 2016 from HDFC. Tenure is 10 years.
    My EMI Is 94000. I wish to do a prepayment of 25 lakhs now. I have plans of squaring off my loan in next 2 years by doing prepayment at the end of every year.

    1. Whether to opt for reduction in EMI or tenure, whenever i do prepayment.

    Please advise.

      1. Pls advise while paying pre payment bank don’t deducted the emi from.. is it advance payment i made i m confused

  16. Hi,

    I took around 13 lack loan and payed instalments around 4 years(13000+).
    Now I would like to close the load asap.
    Can you please advise
    paying all the amount at one shot is best or close it gradually is best?
    Let’s say 2 lack every month.

    Thanks for your advise.

    1. Clearing any kind of debt is always the best option, if you have money. You can save huge interest and invest that money somewhere else.

  17. Nice article and as per my concern If you reduce the tenure the EMI amount will be paid more or else if you increase the tenure the interest should be paid for along the tenure. If you need any information regarding the repayment method visit our website http://www.letzbank.com

  18. I have 23 lakhs outstanding.I would like to know what is the right decision.
    I would like to prepay 2 lakhs. My question is what is the right option to choose

    1. Reducing emi
    2. Reducing tenure
    3. Increasing Emi

  19. I have done prepayment last year for which i reduced my EMI. Now I want to reduce the tenure for that. Is that possible now?

  20. I had taken loan of 570000 from sbi 3 years ago. So is it possible to reduce the tenure now and what will be the new Emi if I want to reduce it from 15 yrs to 8 yrs.
    Plz provide me the ansr.

    1. Hi Amarjeet, Please contact your SBI Home Loan branch. They have the Home Loan EMI Calculator with which they will be able to tell your new EMI immediately.

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