Take a ₹50 lakh home loan at 8.5% for 20 years. The EMI is ₹43,391, and over 20 years you pay ₹54.1 lakh in interest - more than the loan.
Here's what prepaying does to it.
| Plan | Loan ends in | Total interest | Interest saved |
|---|---|---|---|
| No prepayment | 20 years | ₹54.1 lakh | - |
| ₹5,000 extra every month | 15 yr 7 mo | ₹40.2 lakh | ₹13.9 lakh |
| ₹10,000 extra every month | 12 yr 11 mo | ₹32.4 lakh | ₹21.8 lakh |
| One extra EMI every year | 16 yr 9 mo | ₹43.8 lakh | ₹10.3 lakh |
| ₹2 lakh once in year 2, keep EMI | 18 yr 5 mo | ₹47.5 lakh | ₹6.6 lakh |
| ₹2 lakh once in year 2, lower EMI | 20 years | ₹52.2 lakh | ₹1.9 lakh |
Why keeping the EMI saves so much more
When you prepay and keep the same EMI, every future EMI still pays the same amount - but now more of it goes to principal, so the loan shrinks faster and faster. When you lower the EMI instead, you take the benefit as cash flow and the loan runs its full term. In the example, the same ₹2 lakh saves ₹6.6 lakh with "keep EMI" but only ₹1.9 lakh with "lower EMI".
Tell your bank in writing: "Please apply the prepayment to reduce the tenure, keeping the EMI unchanged." Some banks default to reducing the EMI.
Prepay early
In the first years, most of each EMI is interest. A rupee prepaid in year 2 saves far more than a rupee prepaid in year 15.
Charges
On a floating-rate home loan taken by an individual, RBI rules don't allow prepayment or foreclosure charges. Fixed-rate loans can have them - check your Key Fact Statement.
Before you prepay
- Keep an emergency fund of about 6 months of expenses.
- Clear expensive debt first - credit cards, personal loans.
- Compare with investing - see prepay or invest.
Run your own numbers - the calculator shows all these options for your loan.