As beautiful as the dream of taking a home loan is, its EMI can be equally heavy. Seeing salary deducted every month for 20-25 years sometimes forces a person to think whether the house was cheap or the interest? But if you do a little smart planning, you can avoid paying interest worth lakhs to the bank. The special thing is that it neither requires a huge amount nor any difficult formula, just a small prepayment trick can change your entire loan story.
Suppose you have taken a home loan of Rs 50 lakh at 8.5 percent interest rate for 25 years. Your EMI on this loan is around Rs 40,261. In the entire 25 years, you pay approximately Rs 1.21 crore to the bank, out of which about Rs 70.78 lakh is only interest. That means the interest amount alone is about Rs 21 lakh more than the principal amount. This is where most people go wrong.
What to do?
In the initial years of the loan, a major part of your EMI goes towards interest, while the principal amount reduces very slowly. In such a situation, if you just prepay one extra EMI every year from the second year onwards, then the difference becomes visible. For example, if you deposit an extra Rs 40,261 (one EMI) every year from February 2026, your loan can end in about 19 years and 7 months instead of 25 years.
What is the benefit of this strategy?
With this small strategy, you can get free from loan in about 65 months i.e. 5 years and 5 months in advance. Also, this gives you a chance to save interest of approximately Rs 18.31 lakh. That means, the same money which was supposed to go into the bank’s pocket, can become your savings.
What do experts say?
Finance experts believe that the best time for home loan prepayment is the initial years. If money like bonus, salary increment or tax refund is used for prepayment, then tremendous control can be achieved on the interest. However, it is also important that you do not ignore your emergency fund, insurance and important investments before making the prepayment.
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