Prepayment of EMI

Home loan is one of the biggest financial commitments that most people make in their lives. It involves paying a large amount of money every month as equated monthly instalment (EMI) for a long period of time. However, there are some ways to reduce your home loan EMI and save money on interest payments. In this blog post, we will discuss some of the methods that can help you in home loan EMI reduction and achieve your financial goals faster.

Table of contents

•  - What is home loan EMI?

•  - How to reduce home loan EMI? - Transfer your home loan to another lender

•  - Prepay a part of your home loan

•  - Extend the tenure of your home loan

•  - Choose a lower interest rate regime

•  - Documents required for home loan EMI reduction

•  - Good lenders for home loan EMI reduction

 

What is home loan EMI?

Home loan EMI is the amount that you pay every month to your lender towards the repayment of your home loan. It consists of two components: principal and interest. The principal is the amount that you borrow from the lender and the interest is the cost of borrowing. The EMI depends on three factors: the loan amount, the interest rate and the tenure of the loan.

The formula for calculating EMI is:

 

EMI = P × r × (1 + r)^n / [(1 + r)^n - 1]

 

where,

 

P = Principal amount

r = Monthly interest rate

n = Number of monthly instalments

For example, if you take a home loan of Rs 50 lakh at an interest rate of 8% per annum for 20 years, your EMI will be:

 

EMI = 50,00,000 × 0.00667 × (1 + 0.00667)^240 / [(1 + 0.00667)^240 - 1]

EMI = Rs 41,822

How to reduce home loan EMI?

There are some ways to reduce your home loan EMI and save money on interest payments. Here are some of them:

Transfer your home loan to another lender

One of the easiest ways to reduce your home loan EMI is to transfer your home loan to another lender who offers a lower interest rate. This is also known as balance transfer or refinancing. By doing this, you can save money on interest payments and also reduce your EMI.

For example, if you have a home loan of Rs 50 lakh at an interest rate of 8% per annum for 20 years with lender A, and you transfer it to lender B who offers an interest rate of 7% per annum for the same tenure, your new EMI will be:

 

EMI = 50,00,000 × 0.00583 × (1 + 0.00583)^240 / [(1 + 0.00583)^240 - 1]

EMI = Rs 38,765

You can see that by transferring your home loan, you can reduce your EMI by Rs 3,057 and save Rs 7,33,680 on interest payments over the tenure of the loan.

However, before transferring your home loan, you should consider some factors such as:

•  - The processing fee and other charges that the new lender may levy for transferring the loan

•  - The prepayment penalty or foreclosure charges that the existing lender may charge for closing the loan

•  - The difference between the interest rates offered by the two lenders and the remaining tenure of the loan

•  - The terms and conditions of the new lender and their customer service quality

 

You should compare these factors and calculate the net benefit of transferring your home loan before making a decision.

Prepay a part of your home loan

Another way to reduce your home loan EMI is to prepay a part of your home loan whenever you have some surplus funds. By doing this, you can reduce the principal amount of your loan and hence the interest payable on it. You can also choose to either lower your EMI or shorten your loan tenure after prepaying a part of your loan.

For example, if you have a home loan of Rs 50 lakh at an interest rate of 8% per annum for 20 years and you prepay Rs 5 lakh after paying 60 instalments, your new EMI will be:

 

EMI = 45,00,000 × 0.00667 × (1 + 0.00667)^180 / [(1 + 0.00667)^180 - 1]

EMI = Rs 37,637

You can see that by prepaying a part of your home loan, you can reduce your EMI by Rs 4,185 and save Rs 7,53,360 on interest payments over the remaining tenure of the loan.

However, before prepaying a part of your home loan, you should consider some factors such as:

•  - The availability of surplus funds and your future cash flow requirements

•  - The tax benefits that you are availing on the home loan interest and principal payments under Section 24 and Section 80C of the Income Tax Act

•  - The opportunity cost of investing the surplus funds elsewhere for higher returns

•  - The prepayment charges or penalties that your lender may levy for partial prepayment of the loan

 

You should compare these factors and calculate the net benefit of prepaying a part of your home loan before making a decision.

Conclusion

Home loan EMI reduction is a smart way to save money on interest payments and achieve your financial goals faster. However, it requires careful planning and analysis of various factors such as the interest rate, the loan tenure, the prepayment charges, the tax benefits and the opportunity cost. You can use the home loan prepayment calculator to compare different scenarios and choose the best option for you. You can also consult your financial advisor or your lender for more guidance on home loan EMI reduction.