How to save a huge interest on Home loan  How to manage EMI, Tenure & Loan Prepayment?
In this article we have explained;
1. What is loan prepayment? 2. How to prepay loan and reduce EMI or loan tenure? 3. Is loan prepayment a better option than investment? 4. Loan prepayment vs Investment, what is better? 5. What is a loan prepayment calculator? 6. How to repay a loan? 7. What are loan repayment benefits? 8. How to calculate loan interest? 9. How to calculate EMI? 10. What is Home Loan eligibility? 11. What is home loan interest and home loan process? 12. Rent vs buy a home, which is better? 13. How to calculate home loan interest and home loan EMI? 14. How to save max loan interest? 15. How to same maximum home loan interest? 16. How to manage home loan EMI? 17. How to reduce home loan tenure? 18. How to prepay home loan?
Taking a loan to meet our financial need is a very common phenomenon across different income groups. We take up different types of loans for different causes and time periods; like a home loan could be stretched over a period of 30 years to buy a home or a property, or a car loan stretched over 5 to 10 years or an education loan for the purpose of educational degrees or courses etc.
By choosing to repay a loan against making an investment, we tend to lose on the investment returns as an opportunity cost and sometimes end up paying huge EMI amounts for over a long span of time. So, the important question that arises is how to save on loan interest, especially home loan interest and how to reduce the EMI or the loan tenure as a loan prepayment benefit.
So in this Article, we’ll take the example of a home loan Because its tenure is lengthy like for 2030 years So in that, the interest payment increases very much over the period of time So we have many savings options. But this calculation is applicable for all types of loans and you can use an EMI calculator for any kind of loan.
Let’s say we calculated home affordability That we can buy maximum this much big house So should we buy that big house which came out in calculation? So here also, you have to see that how comfortably you can pay your EMI’s. So other factors are also included here That is there any other ongoing loan on you? Do you have a car loan or any personal loan?
So you have to decide how much EMI you can pay maximum. Here we have a thumb rule that Total of all EMI’s of all your loans should not be more than 35% of your monthly salary. So for example, if the salary of a person is Rs. 1 lakh I’m taking this example to ease out the calculations, you can calculate according to your salary. So if the salary is Rs. 1 lakh,
Then that person should not pay more than Rs. 35,000 of EMI including all the loans. So for example, if the EMI of someone’s car loan is Rs. 5000 And let’s say, EMI for a personal loan is Rs. 4000 So EMI of Rs. 9000 is already going. So how much EMI can that person pay for a home loan, 35,0009,000 = Rs. 26,000 can be paid.
So once you’re in EMI calculator , you can enter any loan amount As I entered Rs. 50 lakhs. Let’s say I want to borrow Rs. 40 lakhs home loan. So let’s say we took Rs. 40 lakhs loan and let’s assume that the interest rate for a home loan is 8%.
We’re assuming it average because you’ll also get a 77.5% interest rate nowadays But earlier it was 1011% So type the current interest rate. I took 8% for calculations. After this, we can fill the loan tenure.
So first, let’s understand that calculations And here is your EMI calculated. So in the example we took, the salary was Rs. 1 lakh and if he was able to pay EMI upto Rs.35,000 So let’s say that he was paying a loan of a car in which the EMI going was Rs. 5000 And there was no personal loan let’s remove that from our example, And let’s say he’s giving Rs. 5000 as a car loan and he can pay the remaining Rs. 30,000 as the EMI of home loan.
So here the EMI is coming out approximately Rs. 30,000 So it’s coming in that range. Hence, he can borrow this much loan easily. So you can do the back calculations and check that how much loan can you get and calculate the EMI.
So let’s assume he took a loan of Rs. 40 lakhs at an interest rate of 8% So how much interest will he pay in 25 years? This redcolored cell is showing the total interest payable. It’s coming Rs. 52,61,795. So he will be paying interest more than the loan he took If I change it to 20 years, let’s see now how much it comes.
So in 20 years, the interest payable is equal to the loan he borrowed. But pay attention here, that earlier he was paying Rs. 52 lakhs but now he is paying Rs. 40 lakhs. Saving of 12 lakhs directly just because he reduced the tenure of 5 years.
And the difference in EMI is Rs. 3000. Let’s say if he didn’t take loan for car and then he can afford it easily, Then the EMI would be Rs. 33,000 And we took 35% of the salary bracket so that you can stay in a comfortable position and your liquidity would also not get hampered. Maybe you need funds for an emergency, you may be doing different investments or you also need money for other expenses So we can assume that we can pay 35% of salary as EMI per month.
So according to that, I think if he didn’t have a car loan, Then he would have handled it quite easily So we saw that savings of Rs. 12 lakhs was done so easily If he can increase just 34 thousand then he can save so much interest. Now I’ll give you another example. Let’s say that loan was for 25 years and let’s compare it. He took a loan for 25 years because he wanted to live comfortably and was not able to pay more EMI. And he also have to pay Rs. 5000 EMI for car as well.
And he can only pay EMI of Rs. 30,000 and not more than that But his salary will also keep increasing, it’s not like he would be earning the same salary But EMI for home loan is the same because inflation is not counted on loans. So if his salary will increase, more cash will be generated Which he can add in EMI Sometimes people get annual bonuses, which can be paid in EMI Sometimes you get lump sum payment in business which you can use So in this calculator, I also added a prepayment option so you can add it here.
Let’s say every year you get some payment So assume that his position is tight for 2 years and cannot be filled Let’s say in the 24th month, he got an annual bonus of Rs. 2 lakhs which he paid here. So I entered Rs. 2 lakh here. And let’s say each year he gets some payment So in the 24th month he got 2 lakhs and in the 36th month also, he got Rs. 2 lakh.
After that, let’s add another Rs. 2 lakh payment in the 48th month. And let me reduce a zero here. Now his salary increases and now he can afford Rs. 3 lakhs extra payment So now let’s add 3 lakhs payment extra every year. I did a payment of Rs. 3 lakhs till 108th month and now I’m adding in 120th month. Here you can see that the principal outstanding is just left Rs. 2,62,365. So let me do the total payment of Rs. 2,62,365.
And the loan is paid completely in just 120th month which means in just 10 years So let’s see how much is our total interest saving And the total interest payable is just Rs. 20 lakhs. Earlier it was 53 lakhs and the total savings done is Rs. 32 lakhs. So if you can regularly do prepayment, then you can save too much in interest. This is what I wanted to explain in thisArticle.
And we can also understand it with a graph See, in these interest payments, we did all the prepayments So the principal payments are high But if we don’t do prepayment and pay normal EMI’s Let me delete all these prepayments Then interest payments we’re going like this Rs. 52 lakhs was the total interest payment Now see how it’s going These red bars are interest payments.
So much of interest payments are going So initially, the interest payments are very high So if you want to do prepayments, try to prepay as much you can in the starting years That will be more beneficial for us and that much less interest amount will have to pay because we had done high principal payments earlier So we saw in our calculations that The more we prepay the loan, the more we save on interest costs.
But besides this, there is one more big reason for prepaying your home loan First of all, understand that if we’re buying a house on loan then who is its actual owner You would think that if I bought the house then obviously I am the owner. But no! We did a mistake here. We are the owner of only that much portion for which we paid money. Let’s say if we paid a down payment of 20%, 80% of the money is paid by the bank.
So we’re only 20% owner and 80% owner of that house is bank. Let’s say if our job Or business comes at a risk and we are unable to pay the home loan Then what will happen? Will you be able to live? Not at all! Bank will auction it. In an auction, the house is always sold less than the market rate So first of all, the bank will recover as much as it can, and if some amount is left,
Then you’ll get that. If let’s say you did 1020% of the loan payment, then you only became 3040% owner And still, the bank is the maximum owner. So our target should be to become the owner of our house as soon as possible. And you should not put this money in risky investments Because you should have taken this decision when you bought the house You may have also rented a house or invested that money But since you decided to go for safety and security and buy a house So you should try to become its owner as soon as possible.
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