With home loan EMIs spread over a 20-25-year tenure, even small payments in the initial years can significantly reduce overall interest outgoings over time.
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When buying a home, many home loan borrowers make decisions based on their current financial situation. As their careers progress and financial strength increases, their dilemma is whether to increase their home loan EMI and pay off the loan first, or invest the incremental amount in an SIP without changing their home loan payment schedule.
Why does it matter?
With home loan EMIs spread over a 20-25-year tenure, even small payments in the initial years can significantly reduce overall interest outgoings over time. A home loan EMI may look like a single consolidated payment; however, it consists of two components - outstanding principal and interest. In the initial years of repayment, the interest component of the EMI is much higher because it is calculated on the outstanding principal. This method is called the reducing balance method.
To understand this, let's take two scenarios — in the first, Aman increases the EMI and pays off the home loan, and in the second, he doesn't make any changes in the home loan payment schedule and invests the incremental amount in SIP.
Scenario 1 - Increasing the home loan EMI
Let's assume Aman borrows a home loan of ₹1 crore for 25 years at 9% interest. His monthly EMI will be ₹83,920. After 5 years, he is in a position to increase the EMI and reduce the tenure to 10 years. Here's how much interest he will save.
| Loan amount | ₹1,00,00,000 |
| Amount to be paid back after 25 years | ₹2,51,75,891 |
| Monthly EMI | ₹83,920 |
| Amount paid in 5 years | ₹50,35,200 |
| Interest paid in 60 EMIs i.e. 5 years | ₹43,62,423 |
| Opening balance on 6th year | ₹93,27,244 |
| New EMI | ₹1,18,154 |
| Amount to be paid back in 10 years | ₹1,41,78,430 |
| Total Amount paid in 15 years after reducing tenure | ₹1,92,13630 |
| Interest amount saved | ₹59,62,261 |
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